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Cocoa and cotton 'best bets' among ag commodities

Cocoa and cotton represent rare hopes refuges in a downbeat picture for agricultural commodities, Macquarie said, downgrading forecasts for corn, sugar and wheat prices.

"The two commodities where we still think there is more upside remaining are cocoa and cotton in 2014," the bank said, and even then seeing only cocoa as likely to hold its strength throughout the year.

The cocoa market "is in a structural deficit owing to strong global demand and a supply base concentrated in Africa and Asia that is struggling to catch up implying prices will remain firm over both 2014 and 2015", the bank said, raising by $125 a tonne to $2,725 a tonne its forecast for the average price of New York's front futures contract this year.

While cutting by 65,000 tonnes to 105,000 tonnes its forecast for the world cocoa production deficit, it forecast "another tentative deficit for 2014-15 too", given a revival in demand, which will prompt a "scramble for cocoa butter to re-emerge in the second half of the year".

The bank added that "price rallies will tend to materialise mostly in the second half of the year," once origin selling is "more complete, leaving speculators and uncovered demand-side industry more free to push the market higher".

Year of two halves

For cotton, price strength will be limited to the first half of 2014, with the bank downgrading its forecast for values in the second half.

While the first half of the year will be marked by "tight" stocks outside China, and "not least in the US", the second half will be marked by a "more bearish market environment", enhanced by increased production prospects, given relatively high prices compared with grains.

Chin's change in its agricultural support regime in favour of direct subsidies for cotton farmers, rather than guaranteed prices, may also undermine values, in potentially "lowering domestic prices, thus curbing mills' import requirements", Macquarie said.

"Any associated move to release more of China's vast reserves onto the market will be perceived as bearish."

'Tiny deficit'

For raw sugar prices, Macquarie forecast some recovery in prices in the second half of the year, although only to 18.5 cents a pound in the October-to-December quarter, 1.0 cent below its previous forecast.

"With Indian mills struggling, and pockets of dryness in Australia's cane areas, global sugar production could fall again," the bank said.

"In turn, this would lead to a tiny deficit developing from the season starting in the fourth quarter, which would help support prices higher."

Grains outlook

However, little relief is in sight for prices of corn, for which Macquarie cut its forecast for average prices in 2014 by $0.44 to $412.50 a bushel.

"The world corn market has clearly now moved from the structural tightness that had been seen over the last three years to a period of surplus.

"In general, we hold a bearish-to-neutral view on corn prices all the way through to 2015, as we believe the world's farmer will need to see consecutive seasons of low prices to see a large enough volume of production removed to make a bullish market."

The weak corn market will be a "drag" on wheat prices too, for which Macquarie trimmed its forecast for average Chicago futures values this year by $0.25 to just over $6.31 a bushel.

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