Crop futures have, largely, reached the bottom – but that does not mean a sustained rebound is forthcoming for most contracts in 2016, Rabobank said, rating cotton and sugar among best bets in ags, and cocoa as the worst.
Prospects for most agricultural commodity markets are “showing considerably more risk to the upside than the downside from current levels,” after falls reflecting a strong dollar as well as the building of “very high, or even record” stocks of many crops, Rabobank said.
A strong dollar cuts the affordability of dollar-denominated exports, such as many ags, to buyers in other currencies.
Ag prices appear to have “turned the corner” in the July-to-September quarter, which witnessed multi-year lows in measures such as the S&P agri index and the United Nations Food and Agriculture Organization food price index.
‘Particularly acute weather risks’
However, “as we progress into 2016, agri commodity stocks remain comfortable and are expected to limit price gains to modest levels throughout the year” for the complex as a whole.
Exceptions include New York-traded raw sugar futures, which the bank forecast extending their recent recovery to average 15.5 cents a pound in the last three months of 2016, well above the 14.17 cents a pound at which October 2016 futures were trading at on Monday.
Values will be supported by a world production shortfall of 4.7m tonnes the bank forecast for 2015-16, and against the background of an El Nino which is causing “particularly acute…. weather risks” for the market, having already caused undue dryness in many Asian cane-growing countries.
For cotton too, the bank was upbeat, seeing New York futures recover to 70 cents a pound by the July-to-September quarter, ahead of the 64.36 cents a pound being priced in by the October 2016 contract.
The forecast reflects an expectation that “oversupplied world cotton stocks become moderately more manageable” as weak prices prompt a further decline in world sowings of 2016-17 – of 12%, raising the potential for a 15m-bale global production shortfall.
‘Risks still persist’
However, Rabobank downplayed the potential for a sustained recovery in futures in the main grain contracts, albeit flagging that farmers’ reluctance to sell at low values had helped to put a floor in the market.
“For US producers, sustained grain and oilseed price weakness will continue to encourage on-farm storage, and both futures and basis will have to encourage crops to flow onto the market,” the bank said.
Grain prices could recover short-term to reach, for wheat, an average of $5.25 a bushel in the April-to-June quarter, well above the $4.81 a bushel that May 2016 futures were priced at on Monday.
“Production risks still persist and will likely resurface over the growing season, which could support prices in the first half of 2016,” the bank said, citing dryness which set back the early progress of autumn-sown crops in the US and, in particular, the former Soviet Union, as highlighted separately by farm operator Trigon Agri.
Nonetheless, while world wheat production will drop in 2016-17, global stocks will “remain at sufficiently high levels”, ensuring futures retreat to average $5.00 a bushel in Chicago in the October-to-December quarter, and E180 a tonne in Paris.
South American influences
For corn, Chicago futures are “expected to strengthen into 2016”, averaging $4.20 a bushel in the April-to-June quarter, well ahead of the $3.73 a bushel that May futures are pricing in.
Values will be supported by reduced sowings in Brazil, for the first crop, and Argentina.
However, futures will end next year at about $3.70 a bushel, below the level investors are pricing in, undermined by a strong Brazilian safrinha crop, and a dent to Chinese feed grain imports from a drive to reduce its own stocks.
Soybean futures, meanwhile, will show a brief recovery, as markets currently foresee, early next year to offer farmers a financial incentive for northern hemisphere spring plantings and “avoid a noticeable acreage decline in the US”.
But futures will end 2016 at about $8.95 a bushel, close the level markets are pricing in, as weaker South American currencies encourage output in the likes of Brazil.
Currencies vs low stocks
For coffee, the bank forecast the threat of thin Brazilian stocks counteracting some of the pressure from weak currencies in major growing countries, which cut the value of their products in dollar terms.
“Coffee futures in 2016 will remain under pressure from currency weakness in producer countries,” reinforced by problems such as capital flight or lower investment “arising one way or another”.
But while arabica prices will end the year at some 122 cents a pound, a little below the futures curve, “fundamental bullishness”, after global production deficits of 6.1m bags last season and 2.7m bags in 2015-16, “will surface once Brazilian exports run out of steam”, potentially early in 2016.
Robusta futures will end 2016 at about $1,650 a tonne in London, a little above the level investors are pricing in, with drought setbacks in the likes of Brazil to “cause physical tightness” in the second half of next year.
However, it is cocoa on which Rabobank was more downbeat, seeing New York futures end next year at about $2,700 a tonne – well below the $3,265 a tonne at which December futures were trading on Monday.
The forecast reflected an expectation that higher values will incentivise production in key growing countries such as Ghana and Ivory Coast.
After a production deficit of some 150,000 tonnes in 2015-16, next season “world cocoa supply could see a surplus of 93,000 tonnes”.
News source: agrimoney