Goldman 'bearish' on ags but not other commodities

Agricultural commodities offer by far the worst prospects for returns in a raw materials sector which itself looks a poor rival for now - to the potential offered by shares, Goldman Sachs said.

The investment bank, highlighting this year's significant outperformance of shares over commodities after a decade close correlation, termed this divergence a "return to a more normal state of affairs", in which assets were more prone to idiosyncratic price drivers.

And shares were likely to continue outpacing commodities for now, with history suggesting that in periods of below-par economic growth, "equities typically outperform generally lacklustre commodity returns.

"It was the behaviour of commodity returns during the previous business cycle that was the anomaly, not today," Goldman said.

QE signal

Commodities could regain some ground over equities, but only when central banks reversed policies of ultra-easy monetary policy, signalling more secure economic growth, or inflationary risks either positive for raw material prices.

"Weak developed market real economic growth is keeping quantitative easing firmly in place, supporting equity valuations through low interest rates as well as contributing to equity inflows searching for dividend yields," Goldman said.

"Commodity demand and returns will remain lacklustre until real global demand improves."

Bearish on ags

Goldman maintained a "neutral" rating on commodities, forecasting a positive return of 1.6% over the next year.

However, that forecast masked divergent expectations for different commodity sectors, with gains of 5.0% expected for energy and industrial metals, but a slump of 13.0% in agriculture, and of 4.0% in livestock.

The bank said that its "bearish" view on agriculture was "being driven by the increasing likelihood of a significant rebound in inventories on the combination of a realised record large Latin American harvest, as well as prospects for record-large US production under normal weather conditions this summer.

"While weather remains key to this outlook, with a large increase in US planting required in coming weeks for this base case scenario to play out, it is important to emphasise that we believe the record large realised South American harvest and the current weak level of global consumption requires another major weather shock in the US to keep crop prices near their current levels."

'Not overtly bullish'

Goldman, which on Wednesday cut its expectations for New York raw sugar prices, forecast prices of many agricultural commodities falling over the next 12 months, including corn, lean hogs, soybeans and wheat.

However, it foresaw some scope for headway in cocoa and live cattle, and in raw sugar, for which it flagged potential price supports ahead, even as it cautioned over the pressure on values from a strong cane crop in Brazil's Centre South.

The downbeat stance on agriculture echoes that from Societe Generale on Tuesday, in which it forecast price falls ahead for all major contracts bar Chicago lean hogs, which it said look set to benefit from a seasonal uptick in meat demand, and New York arabica coffee and cotton.

Even so, SocGen said it was "not overtly bullish at this stage" on coffee, but said prices should fare better than those of the agriculture sector as a while "until the true nature of any damage" from frost on Brazilian plantations "can be assessed".

The bank said that it was "not overly bullish" on cotton either, but flagged the potential for drought in Texas, the top US producing state, and a switch by farmers to other crops "to provide support that most other commodities in the sector do not enjoy".

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