StanChart upbeat on soy prices, but cool on coffee

Standard Chartered rated soybeans a top bullish bet in agricultural commodities, foreseeing futures staying at $14 a bushel for most of the next year, and was upbeat on sugar too, but cautioned over coffee and cotton prices.

The bank, building on comments earlier this month, urged sugar consumers to "buy on dips" in prices of the sweetener, warning that the dryness seen in Brazil, the top producing country, and the potential for an El Nino later in the year, could "undermine" world output.

Indeed, world output could, for the first time in five years, fall behind production.

"While fundamentals in the sugar market remain accommodative in the short term, increasing supply risks in the second half of the year and tight producer margins could boost sugar prices into 2015," StanChart said.

The bank restated forecasts for prices of the sweetener ending this year at 20.0 cents a pound, and averaging 23.5 cents a pound next year, well above levels in the low 18s cents a pound that the New York futures market is factoring in.

'Producers should scale down sales'

On soybeans, the bank forecast prices averaging at $14.00 a bushel for the next five quarters, bar the July-to-September period when pressure from the US harvest will drive them down to $13.50 a bushel.

That is a far more buoyant picture than presented by Chicago futures, which see prices falling below $12 a bushel by November, and staying there.

The upbeat forecast reflected rising production costs, and growing needs for soymeal in the livestock sector, particularly in the pork industry, where "the need to rebuild global hog inventories will support meal demand".

Mr Ofon added: "We have reservations with regard to planting weather in the US and socio-political risks in Latin America and the Black Sea region," references to the disruptions prompting Argentine farmers to store crop, and to the Ukraine crisis.

"Soybean producers should therefore scale down forward sales in anticipation of more attractive prices for the new crop," he said.

'Stiffer competition'

However, the outlook for vegetable oil futures was more downbeat, particularly for palm oil, for which the bank forecast price falls ahead, even while raising its estimate for average 2013 values in Kuala Lumpur by 43 ringgit to 2,618 ringgit a tonne.

This compares with a closing price on Tuesday of 2,711 ringgit a tonne for Kuala Lumpur's benchmark June contract.

"Crude palm oil prices are off their highs of the year as output improves in South East Asia and demand drops as a result of competitively priced [vegetable] oils," Mr Ofon said.

"While we still expect firm demand from India, especially if the oilseed harvest disappoints, the crude palm oil market will face stiffer competition from [vegetable] oils."

Soyoil will provide particular competition, "in view of record soybean output in Latin America, higher oil-extraction rates and the lapsing of the $1-a-gallon blending credit for biodiesel in the US".

'Sell into these rallies'

StanChart said it was most downbeat over cotton and arabica coffee, viewing rallies in both agricultural commodities as overpriced.

"In both cases, our view is that the fundamental balances do not justify extensions of the recent sharp increases, and we look to sell into these rallies."

Cotton futures will average 85 cents a pound in the April-to-June quarter, the bank said, below the 90 cents a pound or so suggested by May and July contracts on Tuesday.

The bank highlighted a subsidy revamp in China which is directing support to farmers through direct payments, rather than guaranteed crop prices which, in cotton, have been pitched at levels well above international values, prompting a ramp-up in inventories.

"While we still expect global demand for cotton to improve, policy changes in China may favour the use of domestic stocks, including the drawdown of some of China's massive inventories, in lieu of imports in 2014," Mr Ofon said.

Coffee overheated?

In coffee, while acknowledging the dent to Brazil's production from weather deemed by the Commonwealth Agricultural Bureau as potentially the most severe in more than 50 years, StanChart rated the rally in futures overdone.

It saw prices falling back to 150 cents a pound by the July-to-September quarter, compared with the 180.00 cents a pound which September futures were trading at on Tuesday.

Indeed, investors may see better gains in London-traded robusta coffee, for which the bank forecast prices ending the year at $2,150 a tonne, a little above the futures curve.

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