BarCap upbeat on grain futures - as prices dip

Barclays Capital forecast a revival in grain and oilseed prices, even as they lost further ground on Monday, but flagged a poor prospects for sugar futures, which it saw performing far worse than investors have factored in.

The investment bank said it saw "further potential upside for some agricultural commodities", notably the main Chicago crops, thanks to a lack of success for high prices in curtailing demand.

While prices continued to decline on Monday, when the benchmark November soybean contract fell at one point below $16 a bushel for the first time in a month, the continued decline in prices in recent weeks reflected pressure from the one-off rise in supplies brought by harvest, an effect which would soon ease.

"Prices have softened in the near term as the US harvest progresses, but beyond seasonal pressure, we do not expect weakness to last long," BarCap analyst Sudakshina Unnikrishnan said.

'Further demand rationing in order'

For corn, while acknowledging that high prices have "led to rather weak US export sales demand over recent weeks", Ms Unnikrishnan flagged a revival in consumption of the grain by ethanol plants.

Barclays Capital crop price forecasts for Q4 2012 and (2013 average)

Cocoa: $2,600 a tonne, ($2,683 a tonne)

Coffee: 168 cents a pound, (171 cents a pound)

Corn: $7.90 a bushel, ($7.99 a bushel)

Cotton: 71 cents a pound, (73 cents a pound)

Soybeans: $17.15 a bushel, ($17.33 a bushel)

Sugar: 19.0 cents a pound, (18.0 cents a pound)

Wheat: $8.95 a bushel, ($9.09 a bushel)

"While demand has been softening, with the precarious level of US inventories, we believe further demand rationing is in order to keep inventories at minimum required levels," she said.

"Corn prices will need to stay high enough to incentivise US acres," in spring plantings next year, "competing with record high soybean prices."

Corn prices, as measured by Chicago's front month contract, will average $7.90 a bushel in the last quarter of this year, nearly $0.50 a bushel above where the December lot was trading on Monday, and at $7.99 a bushel in 2013 also well above the futures curve.

Prices will move "higher in the fourth quarter of 2012, remaining elevated through the 2012-13 marketing year".

'Keep prices elevated'

Soybeans will see "a move above $18 a bushel", implying a fresh record high, after harvest pressure wanes, Ms Unnikrishnan said, noting a "lack of evidence of demand rationing so far despite elevated prices, with weekly US exports remaining in rude health.

"Tight global supplies following a series of production downgrades, strength in Chinese import demand, extremely low US inventories and the year on year drop in South American inventories will keep prices elevated."

BarCap forecast prices averaging $17.30 a bushel next year, well above prices that futures are pricing in, with the November 2013 contract trading at $13.44 a bushel on Monday.

And for wheat, the bank said it was "positive" on price prospects, seeing Chicago prices averaging $9.09 a bushel, a little more than futures are counting on, noting that wheat stocks in many leading exporting countries were expected "to post double-digit year-on-year declines in 2012-13".

Stocks in exporter countries are particularly important as they are the ones that importers rely on for supplies, rather than the estimated 31% of world inventories tied up in China "which are not going to find their way to the global market".

'Expected to dampen prices'

However, the bank sounded a downbeat note on sugar prices, despite coming in with an estimate for the world production surplus in 2012-13 which, at 4.8m tonnes, was lower than some other forecasts, such as one last week from Czarnikow.

Crop prices at close on Monday

New York sugar (October): 19.50 cents a pound, (+0.6%)

Chicago soybeans (November): $16.10  a bushel, (-0.7%)

Chicago corn (December): $7.44 a bushel, (-0.7%)

Chicago wheat (December): $8.92 a bushel, (-0.7%)

Paris wheat (November): E260.50 a tonne, (-1.2%)

"The global sugar surpluses in 2011-12 and 2012-13 are likely to add to global stocks," BarCap analyst Kate Tang said.

"Remaining in surplus territory should allay supply concerns and help inventories to rebuild from recent lows.

"This surplus, along with slowing demand, is expected to dampen prices," which will average 18.0 cents a pound next year well below levels of more than 20 cents a pound futures are pricing in.

'Brazil is getting enough rain'

Crop prices on Monday failed to conform to the direction set by BarCap, with raw sugar for October rising 0.6% to 19.50 cents a pound, boosted by talk of rains disrupting cane harvesting in Brazil.

However, the rains are seen as positive for soybean sowings, providing moisture for dry soils, so fostering a 0.9% drop in futures in the oilseed, with a tumble in palm oil futures depressing the complex too.

"Brazil is getting enough rain to pre-empt widespread planting delays, although the north-west half of their growing area still leading dry for next 10 days," Richard Feltes at broker RJ O'Brien said.

He also flagged, "tepid corn export demand, fund liquidation, better than expected soybean yields and poor chart action" in price declines.

Wheat, the price leader early in the day, turned Chicago's weakest contract, softened by forecasts for much-needed rain in Western Australia, with the December contract's failure to hold its 50-day moving average further stoking selling pressure.

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