Goldman Sachs kept a downbeat view on prospects for agricultural commodity prices even as it raised expectations for raw material values as a whole, but acknowledged that it may prove too gloomy on softs and livestock.
The investment bank raised to "neutral" from "underweight" its rating on commodities, saying that prospects for further price falls had been diminished by a recent erosion in values and the prospect of strong economic growth in countries such as the US.
"With commodities down 1% in the past month, and given our economists' forecast for sequential acceleration in growth, we are raising our 12-month allocation for commodities," Goldman said, forecasting a neutral performance over the next three months.
Over the next year, prices, as measured by the S&P GSCI Enhanced Commodity Index will fall by 2.2%, less than the 4.0% drop forecast a month ago.
However, while lifting expectations for prices of industrial metals - which it sees rising 0.5% over the next year compared with a previous forecast of a 4.0% drop –Goldman stuck with forecasts for 10.0% drop in crop prices.
Livestock futures were forecast dropping 3.0% over the next year, up from a previous forecast of a 2.0% drop, although this reflects their strength over the past month, with the bank leaving its target prices unchanged.
"Global agriculture stocks remain elevated," the bank said, adding that the US Department of Agriculture's initial forecasts, on Friday, for crops in 2014-15 "corroborated our expectation for sequential builds in inventories assuming normal weather in coming months".
The USDA forecast records ahead for the likes of world corn production and global soybean inventories, if forecasting some decline in wheat inventories thanks to a drought-hit domestic winter wheat crop.
Still, Goldman said that for wheat, while "while there are downside risks to North America and Australia production" from the potential El Nino weather pattern, "European Union and Black Sea production estimates are in turn skewed to the upside.
"This outlook points to lower wheat prices in coming months, although US wheat prices will need to remain expensive relative to other origins to limit exports."
In fact, the USDA forecast the EU overtaking the US on wheat exports in 2014-15 for the first time on record to become the top exporter.
In corn, the bank, restating a forecast of a drop in futures to $4.00 a bushel on a six-month horizon, said that "assuming normal weather conditions this summer, we expect further increases in US and global corn inventories and hence lower prices".
And in soybeans, Goldman, seeing prices down to $10.50 a bushel in six months' time, said that the "slowdown in Chinese imports on high domestic stocks and the expected record-large US soybean acreage this summer, point to a sharp recovery in US soybean inventories in 2014-15… and lower soybean prices".
The bank also restated forecast for soft commodity prices lower than investors are pricing in, seeing a retreat in cocoa to $2,700 a tonne in as soon as three months, while forecasting sugar prices at around 17.5 cents a pound in a year's time, compared with the 19.25 cents a pound that May 2015 futures are trading at.
However, it acknowledged "upside risk" to its cocoa price forecasts from wet weather which has curtailed hopes for Indonesian production, while highlighting that an onset of the El Nino weather pattern "could exacerbate the magnitude of the expected [world production] deficit".
El Ninos are linked to dry weather in West Africa, the top cocoa producing region, while bringing heavy rains to some South American growing areas, notably in Ecuador.
In sugar, the El Nino, which often brings too much rain to central Brazil and too little to India, means that "the risks to our medium-term forecasts are skewed to the upside".
And in arabica coffee, Goldman said that the uncertainty over Brazil's output, thanks to a drought unprecedented for its time during the growing cycle, means that values may exceed its forecast of 175 cents a pound on three-, six- and 12-month horizons.
In lean hogs too, for which the bank foresees Chicago prices tumbling to 85 cents a pound in a year's time, below the futures curve, the level of unknowns surrounding the US outbreak of porcine epidemic diahorrea virus (PEDv) also creates scope for higher values.
"Given the degree of uncertainty we see potential for high price volatility and renewed highs over the coming months," the bank said.
Lean hog futures have already fallen from historic highs, especially on a front-month basis, with Chicago's May contract standing at 112.65 cents a pound on Wednesday, down 9.2% so far this month.
Although the PEDv outbreak has sapped hog numbers, higher slaughter weights have kept pork supplies stronger than investors had expected.