Farm commodities appear to be "in the early deals of a bull
market", according to the operator of the Bcom index, proving particularly
upbeat over prospects for corn, soybean and wheat prices.
Bloomberg Intelligence acknowledged that the depression in
the Bcom agriculture index, as measured on a spot basis, was reaching "historic
extremes" in terms of its weak performance.
"Since 1991, the 52-week rate of change in the Bloomberg
agriculture spot index has never been lower for longer in a four-year period," the
business said, highlighting the weight on prices in particular from a cool US
August which, in boosting US row crop yields, undermined values.
However, the extent of the downturn represented a contrarian
buy signal, Bloomberg Intelligence (BI), said, saying that "agriculture prices
are about as buried as they get" and that "price gains are likely for agricultural
commodities" in the newly-started October-to-December quarter.
The comments come amid some recovery in hedge fund sentiment
towards the sector, with managed money returning to a net long in major ag
contracts last week, although many commentators remain cautious over prospects
for price gains given large world supplies of many crops.
'Early days of a bull market'
BI's forecast reflected in part an assessment of demand
exceeding supply in many crops, with commentators such as the International
Grains Council, for instance, seeing a drop in world grain stocks this year,
albeit to still-high levels.
In the July-to-September period, "primary demand and supply
drivers", as measured by Bloomberg Intelligence, "held above par [for] the
first quarter in six years".
However, the index operator highlighted in particular the
deep nature of the so-called contango in futures – in which prices of distant
contracts exceed those for spot lots, "indicating little incentive to sell",
and indeed rewarding producers for storing crop instead.
The steepness of the contango in ags is the steepest since August
2006, after which the Bcom ag index rallied 140% to a peak in 2008.
"Futures curves signal agriculture prices are establishing a
bottom," Bloomberg Intelligence senior analyst Mike McGlone said, adding that "agriculture
appears to be in the early days of a bull market".
Movements in the futures curve had been particularly extreme
in sugar which, after providing index investors with gains last year, had "mean-reverted,
taking back 2016's advance", and meaning particularly negative returns for "total
return" investors rolling from spot contracts to more distant ones.
However, Mr McGlone was particularly upbeat over prospects
for soybean prices, flagging a positive chart signal, in an potential inverted
head-and-shoulders pattern, and a level of US stocks which was, while at a
10-year high, low relative to world demand.
"It's more significant relative to global consumption. That longer-term
trend is down," he said, pegging it at 12%, down from a high of nearly 18% in
For corn there was the "potential for historic recovery" in
prices, which were "likely to approach $5 a bushel… based on historical analysis
of the 36-month rate of price changes and demand versus supply".
In wheat, meanwhile, a "rally may be just beginning", he
said, saying that a focus on large world wheat stocks "misses what matters –
burgeoning [US] exports.
"With 56% of production on pace for export in 2017, the
highest in six years, domestic supply matters less."