Soybeans, sugar better bets than coffee or grains

Soybean and sugar prices are poised for gains, with longer-dated cotton futures looking undervalued too, Societe Generale said, but warned that rallies in coffee, corn and wheat appear overdone.

The bank raised by up to $1.19 its quarter-based forecast for Chicago soybean prices, foreseeing them remaining above $13 a bushel in a year's time.

That is well above the $12.01-a-bushel level that March 2015 futures were pricing in on Thursday.

The upgrade reflects the strong, if waning, US export pace, the diminishing forecasts for the harvest in Brazil and, further ahead, expectations that next year's US harvest will not live up to the expectations of 3.55bn bushels that officials have pencilled in.

"Our updated supply and demand estimates are less optimistic than the US Department of Agriculture's, and we expect prices to rise post-harvest as the projected US stocks-to-use ratio remains below 6% for the fourth straight year," SocGen analyst Christopher Narayanan said.

The bank forecasts US soybean stocks ending 2013-14 at 126m bushels and next season at 174m bushels, estimates well below the USDA's.

'We could see prices rallying'

For sugar, the bank, which had been bullish on the sweetener heading into the current rally, lowered its price estimates, counter to the direction of forecast revisions from many other analysts, given concerns over damage from drought to Brazil's cane crop.

Selected SocGen softs price forecasts, change on previous and (gap from futures curve)

Coffee, Q4 2014: 156 cents a pound, +46 cents a pound, (-21%)

Cotton, Q4 2014: 85 cents a pound, +4 cents a pound, (+6%)

Raw sugar, Q4 2014: 20.2 cents a pound, -0.8 cents a pound, (+10%)

White sugar, Q4 2014: $563 a tonne, -$21 a tonne, (+16%)

Prices for quarter average ICE spot contract, except for white sugar, which is traded on Liffe

"Strong production and availability of the Thai harvest should help temper any immediate concerns over the Brazilian crop in the near-term," Mr Narayan said, noting a 31% jump in Thai sugar output since November 25.

However, with the bank foreseeing a lower production surplus of 1.0m tonnes in 2014-15," a level that can easily switch to a deficit… we could see prices rallying in the second half of 2014", and expected to top 20 cents a pound in New York the October-to-December period.

New York cotton futures too by then look set to bet levels investors are currently factoring in, remaining well above 80 cents a pound on a quarter-average basis, helped by continued thinness in supplies in the US, the top exporter.

"Inventories are expected to remain tight, particularly if the lingering drought conditions threaten production numbers."

Coffee to correct

However, the bank, while hiking its forecast for coffee futures because of the impact of Brazil's drought, forecast New York arabica prices correcting to levels of 150-160 cents a pound even into 2015, despite pencilling in a 10% drop to 35.2m bags in Brazilian arabica production this year.

Selected SocGen grain price forecasts, change on previous and (gap from futures curve)

Corn, Q4 2014: $4.80 a bushel, -$0.02 a bushel, (-1%)

Soybeans, Q4 2014: $13.32 a bushel, +$0.94 a bushel, (+13%)

Soymeal, Q4 2014: $377 a short ton, +$27 a short ton, (+3%)

Wheat, Q4 2014: $6.23 a bushel, -$0.39 a bushel, (-11%)

Prices for quarter average Chicago spot contract

Total Brazilian coffee output was pegged at 50.9m bags.

"We remain optimistic on the Colombian recovery, pegging production there at 10.4m bags, up 2.5% from our 2013-14 forecast of 10.2m bags," Mr Narayan said, flagging too ideas that output in Central America is "stabilising", after an outbreak of coffee rust.

"While global supplies of coffee are tightening, the recent volatility in prices is likely to continue to subside and normalise prices in the second quarter and beyond."

'Risk built in'

And the bank was downbeat on prospects for grain prices too.

For wheat, although the condition of US hard red winter wheat is declining, "the increase in plantings could help limit the downside to production".

"We see much of the risk built into current prices."

And while the Crimea crisis has gained much attention, given that the region accounts for roughly 6% of Ukraine's winter wheat sowings, and a "negligible" area of corn and spring wheat, "any reduction in grain plantings in the Crimea, is likely to have a muted effect on Ukraine's total grain production".

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