Political risks and higher production costs, besides relatively squeezed supplies, mean it is too early to give up on the agricultural commodities rally, Rabobank said, rating soybeans, cattle and corn among top picks.

The agricultural lender, rounding off a week of bank forecasts for agricultural commodity futures in 2012, said that prices would prove cheaper over the year than in 2011, thanks to "improved fundamental balances", with stocks of many crops expected to rebuild, and "uncertain economic conditions".

However, the bank ruled out a 2008-09-style plunge, saying "elevated price levels must persist to encourage farmers to continue expanding production", and keep up with demand whetted by emerging market appetites.

Furthermore, threats to supplies from factors such as the La Nina weather pattern and politics, "have increased again for 2012".

The bank said it saw "upside from depressed spot prices" for a range of crops, including corn, soybeans, sugar and wheat, "as fundamentals reassert themselves".

'Very real risk'

Political risk was being heightened by the threat of agriculture becoming a pawn in the US presidential election campaigns, and by the world's growing reliance for supplies on areas such as the former Soviet Union and South America, which have a history of intervention in the sector.

"Geopolitical factors, such as the 2010-11 Black Sea region grain export bans and a return of civil war to the Ivory Coast, had significant impacts on agricultural markets," Rabobank said.

"We believe that 2012 will once against see political intervention as an important determinant of winners and losers in the agri-complex."

There was, for instance, a "very real risk" that Argentina or Brazil, which "now have a critical piece in world trade", could introduce policies to protect rising domestic demand.

Argentina already exerts considerable control over crop exports, to protect domestic supplies, while Brazil earlier this year considered curbs in sugar exports to promote conversion of sucrose into ethanol, to meet a shortage of the biofuel.

In the former Soviet Union, whose grain exports bans in 2010-11 sent prices soaring, the threat of further curbs "is compounded by the likelihood the policies of the constituent countries would move in parallel".

Losing the edge in costs 

Meanwhile, higher production costs, lifted by hikes in the like of fertilizer, fuel and seed bills, will limit falls in agricultural commodity prices too.

"Higher production costs will limit the downside price potential for most agri commodities in 2012, as prices must persist above breakeven in order to encourage farmers to increase production," Rabobank said, noting that bills for corn and wheat growers had near-doubled in the past decade.

However, costs rises have been especially fast in developing economies, thanks to factors such as soaring wages, cutting to $50 a hectare, from $250 a hectare, last year the cost advantage that Russian wheat farmers have over US peers.

In soybeans, production costs in the key Brazilian state of Mato Grosso hit $11 a bushel this year, including transport to port, meaning there is "limited downside" to Chicago prices now that they are approached this level.

"This trend of diminishing cost advantages… is likely to continue in 2012," limiting the ability of the likes of South American and Black Sea producers "to offer exports at a discounted price relative to higher-cost producing countries".

Best, and worst, bets 

The bank rated soymeal as its top farm commodities pick for 2012, saying Chicago futures would rebound to $335 a short ton in the last quarter of the year, "after underperformance relative to soyoil and soybeans in 2011".

However, soybeans offered the next best bet, given the prospect of US farmers switching to relatively-high-priced corn instead, so keeping a lid on supplies of the oilseed.

In the livestock complex, Rabobank recommended live cattle futures which, after a tumble early in 2012 as ample supplies on feedlots hit the market, will be revived by relatively low supplies of unfattened animals to follow on.

The bank rated coffee the worst prospect for 2012, given "large harvests expected in Brazil and Vietnam", although it added that a price "collapse" was not on the agenda "as it will take a couple of seasons to replenish stocks and reverse the decade-long trend of falling stocks levels".

Barclays Capital, Goldman Sachs, Morgan Stanley, Societe Generale and UBS have also given commodity outlooks in recent days.