Investors may be underestimating the boost to commodities from the Federal Reserve's decision to delay withdrawal of emergency economic support, Morgan Stanley said, restating corn as it most bullish bet in the complex.
Commodities, while joining the rally last Wednesday after the Fed revealed the delay to the "tapering" of US bond market purchases of $85bn a month, have "underperformed most asset classes" since, Morgan Stanley noted.
The CRB commodities index stood on Monday at 286.6 points, among its lowest levels in a month.
However, that ignores the long-term effects of the Fed's move, which "may be underappreciated", the investment bank said.
"In our view, tapering of asset purchases is a positive for all risky assets – including commodities."
The boosts from the Fed delay included, besides the direct boost in terms of lower borrowing costs, a potential increase in inflation expectations, which is often supportive of prices of tangible assets such as commodities, and a "derisking of the bear case" on emerging markets.
Indeed, with less chance of dollar strength, the pressure has reduced for a shift in capital flows to developed markets from emerging countries, some of which, such as Brazil and China, are huge players in commodity markets, agricultural ones included.
Dollar strength would have reduced the affordability to some of the big emerging market buyers, such as Indonesia and South Korea, of farm commodities which are largely dollar denominated.
Furthermore, it risked encouraging output in major crop exporting countries, such as Argentina, where currency devaluation would have made shipments more competitive and encouraged exports.
South America impact
Indeed, Morgan Stanley said that agricultural commodities prices would "likely be most impacted by muted dollar strength and slowing declines in emerging market currencies, which should help boost US ag exports and temper plantings in South America".
The recovery in Brazil's real from a rate of R$2.455 per $1 a month ago to Monday's rate of about R$2.20 per $1 had lifted the breakeven price for a Brazilian corn farmer to, in dollar terms, about $5.44 a bushel from $4.89 a bushel.
The "deteriorating" prospects for South American farmer returns "help support our call that Brazilian and Argentine production could fall as much as 11% year on year", the bank said.
"A modestly weaker dollar also lends credence to our out-of-consensus call that US exports could rise by as much as 108% year on year" in 2013-14.
Indeed, Morgan Stanley restated corn as its most bullish commodities bet, with soybeans second, noting also a revival in ethanol margins and in concerns about dryness damage to US crops.
'More dovish regime'
The bank also downplayed more recent suggestions that impact of the Fed's delay may prove only temporary, being perhaps of only one month.
"Even when tapering does begin, it should occur at a very modest pace according to the latest commentary from the Federal Reserve."
Besides, some economists "suggest that the tapering delay may indicate a transition to a new more dovish Fed regime", which would indicate longer-term dollar weakness, with all its implications for commodity prices.
'Selling will step back'
Separately, Macquarie flagged the role of weaker dollar expectations in underpinning prices of some soft commodities, such as arabica coffee and sugar, in which Brazil is the top producer and exporter.
"Producer selling will step back on the back of the Fed decision, as the real has now strengthened," the bank said.
On Friday, Deutsche Bank also noted the potential for a softer dollar to boost sugar prices, while Creighton University flagged support from the Fed's move to "agriculture commodity prices, farm income and farmland prices in the weeks and months ahead".