Investors are too optimistic on prospects for the US soybean
harvest, Societe Generale said, as it lifted its forecast for new crop futures,
forecasting "another rally" in lean hogs and gains in sugar prices too.
The bank recommended a long bet in Chicago's November
soybean contract as it raised to $13.66 a bushel its estimate for front-month
futures in the October-to-December quarter, foreseeing a continued to $14.11 a
bushel in the April-to-June period next year.
The recommendation is something of a contrary bet, with
November futures tumbling some $0.50 a
bushel from a high two weeks ago to stand at $12.19 ¾ a bushel on
Thursday, undermined by a rapid pace of US plantings and benign weather which
bodes well for the harvest.
Rabobank this week forecast average October-to-December soybean
prices at $11.50 a bushel.
However, Societe Generale said it was foreseeing a "much
tighter inventory picture than the US Department of Agriculture" for US soybean
'A bit too optimistic'
US inventories will end this season at 104m bushels, 26m
bushels fewer than the USDA estimates, sapped by "resilient" demand both
domestically and on export markets.
And while stocks will recover in 2014-15, the rebuild will
take them to 262m bushels, well below the 330m bushels that the USDA foresees.
The SocGen estimate reflects both a lower production
forecast - based off a yield of 44.7 bushels per acre, compared with the USDA's
45.2 bushels per acre – and a more generous estimate for exports.
"We believe that the USDA is a bit too optimistic on the
likely size of the new US soybean crop, even when we take into account the
potential positive impact of a strong El Nino," SocGen analyst Christopher
"While we do expect the new corn crop to be large, we
consider the current new crop [soybean] prices to be undervalued given the
extremely low stock levels we expect at the end of the current marketing year."
High on the hog
The bank forecast "another rally in the works" for lean hog
futures too, boosted by the dent to pork supplies from the porcine epidemic
diahorrea virus (PEDv), at a time when high prices of protein in general may
limit consumers' willingness to switch to other meats.
"We expect summer meat demand to remain resilient, helping
to support hog prices through the summer and beyond," Mr Narayanan said.
"While heavier carcass weights will help stem the drop in pork
production," continued cases of PEDv and the porcine delta coronavirus (PDcov),
a similar disease, "are expected to provide support to hog prices".
The bank hiked by 38 cents a pound its forecasts for prices in
the last three months of 2014 and the first quarter of next year, taking both
above 120 cents a pound, well above the 93.725 cents a pound being factored in
by December futures , and the 89.175 cents a pound February 2015 futures are trading at.
'Commanding a premium'
Forecasts for live cattle futures were also raised to levels
above the futures curve, although less dramatically, with SocGen seeing prices
heading above 160 cents a pound early next year.
With US supplies of fattened cattle limited, and demand for
beef underpinned by decent economic growth, "feedlots are expected to continue
commanding a premium for these finished cattle".
And, in soft commodities, the bank stayed with forecasts for
futures above those investors are factoring in, forecasting prices averaging
20.2 cents a pound in the last three months of 2014.
"Dry weather in India and Thailand, brought by El Niño
conditions, often threatens the sugar crops there," Mr Narayan said, noting
also the potential for setbacks in Brazil's cane belt, which suffered drought
early in 2014, and is typically overly wet during El Niño periods.
By contrast, the bank remained neutral on prospects for corn, saying a strong US harvest this year should balance firm demand, but forecast a drop in Chicago wheat futures to average $5.71 in the first quarter of next year, with production prospects strong for most major producing countries.