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.
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.
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
"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
"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."