Societe Generale highlighted the gap between under-pressure grains and a soft commodity complex supported by "increasingly strong fundamentals" as it named cocoa and cotton among its top picks for raw material investors.
The bank, in short-term price forecasts, offered some hope to grain and oilseed investors, saying that futures had fallen sufficient to expect a pause on their "bearish path".
On corn and soybean futures, Societe Generale said that "while optimistic estimates for new crop continue, recent price action calls for a bounce," with "frost concerns from a later-maturing crop" adding to reasons to expect a more stable prices for now.
Although the bank was not so upbeat on prices of soft wheat, as traded in Chicago, saying that its "high premium to corn should abate", it was more optimistic on prospects for hard wheat, as traded in Kansas City.
"High quality wheat should perform well against feed quality wheat as quality shortages of milling wheat continue to exist despite better than expected initial harvest reports globally."
'Increasingly strong fundamentals'
However, the bank saved its most positive comments for selected livestock and soft commodity futures, which comprised all but one – aluminium – of its top overweight short-term bets.
Societe Generale, noting the role of "increasingly strong fundamentals" in supporting soft commodity prices, said that cocoa should remain supported by "drier weather in West Africa", the top producing region.
This "raises concerns on next crop yields and quality" which have already helped cocoa futures set an eight-month high in New York last week, for a spot contract, of $2,514 a tonne, while hitting a 10-month high of £1,685 a tonne in London.
Indeed, nearer-term contracts should far particularly well, with "recovering global demand and future supply concerns" supporting spreads between short and far-dated futures, the bank said.
On cotton, Societe Generale said that "low exchange inventories and the lateness of US crop development should keep prices elevated".
"Excessive rains have slowed crop development in several areas and higher abandonment is expected than previously forecast in the US."
The US Department of Agriculture, noting heavy rains, on Monday cut its estimate for the domestic cotton yield this year by 18 pounds per acre to 813 pounds an acre, "due mainly to a 17% reduction in the South East from the 2012 record".
USDA data showed the condition of the crop deteriorating in the week Sunday by two points to 43% rated in "good" or "excellent" condition, led by a nine-point drop in Alabama.
On stocks, the inventories available for delivery against Ice cotton futures have continued to decline, reaching 51,409 bales as of Tuesday, the lowest in eight months, and down from levels above 600,000 bales in early July.
SocGen was also upbeat on prospects for lean hogs, saying that "prices should rise in the short-term due to increased demand from late summer grilling and tighter supplies relative to last year".
And it was "moderately bullish" on feeder cattle too, for now, "as overcapacity has become a problem for feedlots and lower corn prices on the horizon could lead to bidding wars in order to fill empty pens".
The comments came in a report in which the bank highlighted the enhanced importance of individual fundamentals in commodity price moves, thanks to the "normalisation" in markets which has reduced the power of "risk on" and "risk off" trades across asset classes.
"The resulting increasing decorrelation seen in commodities is good for diversity-seeking portfolio investors," the bank said.
However, "the return of decoupling… adds a bearish risk to flat price and spread yields for long-only investments".
Commodities out of fashion
The comments came in a report in which the bank said that agricultural commodities led a net outflow of $16.8bn in June in assets under management in raw materials.
Agricultural commodities saw a net outflow of $4.86bn, ahead of a loss of $4.74bn from precious metals, and $4,73bn from energy.
The data tally with an index kept by Bank of America Merrill Lynch, which showed fund managers underweight in commodities by a record amount in June, by a net 32% of asset allocators questioned.
However, there has been some clawback in the negative sentiment, with the latest survey, unveiled on Tuesday, showing a net 23% of fund managers underweight on commodities.