ANZ downbeat on cotton, sugar - but not on beef

Australia & New Zealand Bank sounded a bearish note on cotton futures, and was cautious over rebounds in sugar and dairy too, but joined commentators upbeat on the beef sector.

The July-to-September quarter will offer "no reprieve" for cotton futures, at their lowest in five years in New York on a front contract basis, depressed by improved ideas for the US harvest, after drought-breaking rains in top producing state Texas, besides concerns over Chinese demand.

China is reforming the subsidy regime which, in offering domestic farmers prices well above international ones, created huge domestic stockpiles and encouraged imports, lifting values worldwide.

"The price outlook for cotton is subdued despite a 22% decline in futures prices since early May," ANZ said.

"The persistent negative fundamentals for cotton have finally come to the fore, with any fast turnaround in sentiment unlikely.

"Near term, prices are likely to languish below 70 cents a pound, with the potential for any modest rally not likely until the fourth quarter, when Chinese demand typically improves."

Indeed, the US Department of Agriculture's next Wasde crop report, on August 12, could further depressed cotton values, in raising estimates for domestic production.

'Further liquidation likely'

One factor in cotton's favour was that at least managed money has already sold down its net long position in New York futures and options to the lowest since December 2012, reducing the potential for further pressure from this score.

"Selling from this segment of the market now looks complete," ANZ said.

However, such a reduction in long positions is "not as mature in sugar, with some further liquidation still likely, limiting any sugar price upside in August".

The bank - also noting that Brazilian sugar export volumes had fallen some 500,000 tonnes below average in May and June, typically stronger months in coming in the early stages of the cane harvesting season said that sugar futures were likely to "continue to track sideways" for now.

That said, "price risks remain skewed to the upside in the fourth quarter of 2014 and beyond for sugar consumers", with the potential for an early finish to Brazil's cane crushing season.

Dairy vs beef

The bank was also cautioned over dairy prices, saying that any recovery in prices may have to wait until inventories are worked through in the second half of this year.

Even then "any bounceback is expected to be more modest than previous cycles", restrained by "stable-to-higher" production in Oceania, a region which, in New Zealand, includes the top milk exporting country.

However, the bank forecast a "strong" outlook for beef prices, saying US data last Friday on the US herd, and the number of cattle on feedlots, signalled "supply tightness for some time yet".

ANZ highlighted in particularly data showing weaker-than-expected retainment of heifers, "suggesting the rebuilding of the US herd will be slow".

The data was "positive" for Australian values too, which could outperform if rains return to eastern cattle areas, encouraging larger herd numbers.

"The discount between Australian and US cattle prices is at its widest in 15 years. This would quickly narrow with a better wet season in Australia later in the year."

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