Investors are "undervaluing risk" in agriculture, Rabobank said, even as it cut hopes for near-term wheat prices, and for prices of palm oil, which look set to continue to be depressed by buoyant production.

The bank contrasted the decline in price volatility "in almost all agricultural market to multi-year lows" with "highly uncertain" supply fundamentals evident in, for instance, the slump in corn and soybean stocks following disappointing US and South American harvests last year.

"Agricultural markets appear to be undervaluing risk," Rabobank said, noting that volatility was declining across most asset classes "amid a surplus of liquidity emanating from central bank stimulus programmes".

'Higher geopolitical risk'

However, agricultural commodities were vulnerable to "another volatile move in 2013" given poor growing conditions "in a number of the world's key producing regions, and in the US ahead of [spring] planting."

And, longer-term, the risks of price volatility were being raised by an increased reliance on "less reliable" production regions.Traditional producing regions have limited ability to substantially increase production as land resources are tapped out," the bank said.

"Production in regions such as South America and the Black Sea region is becoming critical to help meet demand needs. However, these regions typically have more volatilie weather, less reliable logistics and higher geopolitical risk.

"Both short-term and long-term trends suggest markets are failing to accurately reflect likely volatility in agri markets."

Price downgrades

Yet the comments came as Rabobank cut expectations for palm oil futures by up to 400 ringgit a tonne, citing improved prospects for output from Indonesia and Malaysia, the top two producers, for which the harvest estimate was raised by 1m tonnes to 47.5m tonnes.

"We expect this high output will continue to cause prices to trade rangebound in the first quarter of 2013, as we see little additional demand coming online to compensate for the higher production," the bank said in a monthly briefing.

The bank also reduced its forecast for Chicago wheat in the near term – by up to $0.80 a bushel - if still keeping its expectations above those that futures are pricing in.

Production challenges

However, it raised its estimate for wheat futures heading towards the end of the year, citing reduced prospects for some 2013 crops, with the estimate for the US harvest cut by 176m bushels to 2.18m bushels following drought setbacks to the early growing season.

"Expected abandonment for 2013-14 is increased from 12.8% to 15.0%, as ongoing rainfall deficits in hard red winter wheat regions, combined with the worst pre-winter conditions on record, are likely to limit emergence in the spring," the report said.The estimate for Russia's harvest was cut by 2m tonnes to 51.2m tonnes "as the winter period has failed to see improvements to lingering drought conditions from 2012-13.

"While large year-on-year production increases in 2013-14 are not in jeopardy at this point, we note that severe drought conditions remain a significant downside risk to 2013-14 production."

Crop setbacks

Rabobank also became the latest in a series of forecasters, including the likes of Macquarie, to sound a, relatively, bullish note on cotton prices, raising its estimate for values at the close of the year by 5 cents to 85 cents a pound.

While short-term values are likely to be depressed by the release of supplies from some of China's huge inventories, prices will rise late in the year "as a reduction in exportable supply impacts the market".

"Dry conditions continue to hamper global cotton," the bank said, flagging the impact of a heatwave on non-irrigated Australian crops, and dryness in Brazil and India too.

"We forecast a 9% year-on-year reduction in the Indian crop in 2012-13, and may have to adjust our output expectations further if arrivals continue to lag.

"The price impact of changes to Australian, Brazilian and Indian crop estimates are significant given they represent the second, third and fourth-largest exporters."