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Cattle, corn top commodity bets - Morgan Stanley

Morgan Stanley rated livestock and grains its top commodity sector bets for 2014, flagging support from firm demand, but was more downbeat on prospects for soft commodities, and in particular cotton.

The investment bank forecast that commodities overall were "unlikely to outperform" this year despite an improvement in world GDP growth, with raw materials generally performing better later in the economic cycle.

"As physical assets, commodities respond to the current environment while equities price off future expectations," the bank said.

"Commodities continue to benefit from rising demand until growth actually turns negative."

For reasons of diversification, there was "still a place for commodities" in investors' portfolios, Morgan Stanley added, echoing comments from rival Goldman Sachs.

'Tight supply'

But this late-cycle dynamic applied more to base metal and energy markets than to those for agricultural commodities, for which the bank rated livestock its "most preferred" bet for 2014, with grains in second place.

"Tight supply and long production cycles should continue to support livestock prices well into the second half of the year, before new supply and lower feed costs begin to weigh," Morgan Stanley said.

The bank was particularly upbeat over prospects for prices of live cattle - those ready for slaughter - seeing supplies remaining squeezed by the hangover from a low-take up by feedlots, facing high grain costs until recently, of feeder cattle.

"Negative feedlot margins should continue to limit placement demand in the coming months pending the arrival of new supply after mid-year," Morgan Stanley said.

Meanwhile a decline in the US in per-capita beef demand, which tumbled 2.1% in 2013 to a 30-year low, should slow, and prove "more than offset" by population growth.

'Oversold market'

In fact, Morgan Stanley rated live cattle as one of its second-most bullish bets among individual commodities, alongside corn which was overtaken by palladium as the raw material with the most promising price outlook.

"The [corn] market remains oversold in the face of strengthening US export and ethanol demand," the bank said, standing by a forecast for an average Chicago front-contract price of $4.60 a bushel in 2013-14, above the futures curve.

US ethanol production was set to rise 8% year on year as the country switched from being a net importer of the biofuel to a net exporter, while feed demand would be boosted by growth in livestock numbers and a switch from wheat, which is higher priced.

The bank also raised doubts over ideas of large sowings of second-crop corn in Brazil, expectations which have risen somewhat so far in 2014.

"With Brazilian farmers losing the equivalent of $32 an acre planting corn, we expect 2013-14 safrinha acreage to decline at least 13% year on year, as farmers switch to cotton and other crops."

Mixed for softs

Indeed, Morgan Stanley rated cotton as one of its most bearish bets, thanks to production prospect boosted, at least for next season, by "weakening economics for competing crops", besides the threat of a change to China's support regime, which has been a huge support to world prices of the fibre.

"With global 2013-14 production expected to exceed consumption by as much as 10m bales, official confirmation that China plans to end its stockpiling will likely send cotton prices tumbling well below current marginal cost of production."

Sugar represented at least a "neutral" price outlook, with the prospect of slowing cane production growth, and a greater take in Brazil of the crop for ethanol rather than the sweetener, underpinning values.

"Growth in the global cane crush and rising Brazilian ethanol consumption should provide increasing resistance to further sugar price declines into the second half of 2014."

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