SocGen negative on ags - but with exceptions
By - Published 21/11/2012

Societe Generale maintained a downbeat on agricultural commodities, even while upgrading forecasts for corn, soybeans and wheat, and voicing bullish comment on coffee and sugar prices.

The bank, which was taking a bearish outlook on crops heading into the autumn correction, recommended commodity investors to take an "underweight" position in agricultural, and energy, contracts in their portfolios, foreseeing better hopes for prices of industrial and precious metals.

Values of base metals, such as copper, looked set to be underpinned by improved hopes for the Chinese economy besides the resolution of the US budget talks

However, the caution over farm commodities disguised upgrades of nearly $1 a bushel to ideas for expectations for wheat prices heading into 2013.

'Trending higher'

SocGen analyst Christopher Narayanan cited the threats of too much rain to Argentine wheat, and too little for the Australian crop and newly-planted winter wheat in the US, as behind its upgraded forecast.

SocGen wheat price forecasts and (change on previous forecast)

Q1 2013: $8,92 a bushel, (+$0.93)

Q2 2013: $8.53 a bushel, (+$0.90)

Q3 2013: $8.15 a bushel, ($0.86)

Q4 2013: $7.95 a bushel, (n/a)

"Given this backdrop, we have raised our 2013 quarterly Chicago wheat price forecasts," to levels in line with the futures curve, suggesting prices, down more than $1 a bushel from a July high, have dropped enough.

Indeed, prices will next year average, at $8.39 a bushel, some 13% more than in 2012, and set to remain a relatively good bet longer-term too given the need to attract sowings from rival crops.

"With arable land showing signs of stabilising after a long period of growth, competition on acreage is expected to intensify," Mr Narayanan said.

"Given the rapid growth in corn and soybean use in both livestock feeding, particularly in emerging markets, and in the use of biofuels, wheat is expected to lose its share of this global acreage.

"Therefore we continue to see wheat prices trending higher versus a more muted corn and soybean price forecast."

Seed squeeze ahead?

However, the bank raised its estimate for corn prices too, by $0.78 a bushel to $7.38 a bushel for the first quarter of next year, also in line with the futures curve, and flagged a threat already to the US 2013 crop - this time from seed availability rather than the weather which slashed the latest harvest.

SocGen corn price forecasts and (change on previous forecast)

Q1 2013: $7,38 a bushel, (+$0.78)

Q2 2013: $7.05 a bushel, (+$0.74)

Q3 2013: $6.74 a bushel, ($0.71)

Q4 2013: $6.57 a bushel, (n/a)

"One key risk becoming apparent to the market is seed availability for the next US planting season, following this year's drought-induced production losses," Mr Narayanan said."One question that remains to be answered is whether seed companies will be able to meet farmer demand in the coming months."

"At present, comments from earnings calls of the major seed companies have yielded generally optimistic views regarding seed availability. However, we highlight this as a risk."

'Lower yield potentials'

However, the bank saw greater scope for price gains in its forecasts for soybean futures, which it also raised, warning that the sell-off in Chicago values of some 20% from September highs had been "overdone", given the uncertainty over the next South America crops.

SocGen soybean price forecasts and (change on previous forecast)

Q1 2013: $15,49 a bushel, (+$0.30)

Q2 2013: $14.81 a bushel, (+$0.30)

Q3 2013: $14.15 a bushel, ($0.29)

Q4 2013: $13.80 a bushel, (n/a)

Even if Argentine and Brazilian farmers do catch up from early rain delays, continued setbacks "could force farmers to plant a shorter-season soybean variety."These varieties typically have lower yield potentials than full-season soybeans due to the earlier maturity times," Mr Narayanan said.

But he slashed expectations for soymeal prices, forecasting "further correction" in values, given a stocking spree by buyers late in the 2011-12 which has heralded more downbeat demand this season.

"While the US soybean crush has begun at a strong pace, US soybean meal export sales have been more muted to start the new marketing year."

'Risks in Asia'

Indeed, SocGen recommended a bet of balancing a short position in Chicago soymeal against a long position in March soybeans themselves.

Its other trading recommendation in agricultural commodities was a long position on New York's March raw sugar contract, given "risks in the Asian market".

"Chinese imports remain strong under an apparent restocking programme, while there are threats to Indian and Thai production," Mr Narayanan said, flagging a "limited downside risk" to prices.

Longer-tem, "global consumption is expected to grow at a faster rate than global production", he added, in comments which contrast with a bearish view on sugar by many other commentators, given a global production surplus forecast for 2012-13.

'Extremely undervalued'

The bank also took a contrarian stance on coffee, which commentators such as Macquarie have said appears set for price weakness, given early indications point to a strong Brazilian 2013 harvest, and potentially a second successive season of world production surplus.

However, Colombia, whose output has been undermined for some years by disease and the implications of a replanting programme, remains "an upside risk to prices".

And inventories of 2.5m bags certified for delivery against New York futures, while on a rising trend, remain weak by past standards.

"Coffee prices appear to be extremely undervalued.

"The sell-off in coffee is overdone as the market does not fully appreciate how historically low inventories are,."

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