The tumble in agricultural commodity prices spurred by the coronavirus outbreak, and collapse in oil prices, offers a “timely opportunity” to buy, JP Morgan said, recommending a long bet in corn call options.
The investment bank said that falls in ag prices - which led the Bcom ag subindex down 1.9% at one point on Monday to 35.84 points, the lowest since it was started in 1991 – were “outsized”, and not reflected in supply and demand fundamentals for the sector.
“Underlying agri commodity fundamentals have not at this point reflected the weakness embedded in prices, remaining largely constructive throughout the pandemic contagion of March,” JP Morgan said.
There was “no sign of tangible demand destruction just yet”, with the US Department of Agriculture’s Wasde briefing last week delivering “steady data”, US export sales “improving”, and China continuing to buy “significant tranches” of soybeans – albeit, reportedly, from South America.
The bank acknowledged the prospect of a significant economic hit from the Covid-19 outbreak, now forecasting a “technical recession in both the US and EU through the first half of 2020”.
It added that in ags, “highly negative price momentum across the complex keeps us cautious in the short term”, adding that “further [price] weakness cannot be ruled out”.
However, the EU and US recession “is expected to be very short lived in nature, with activity normalising by mid-year and growth tracking back above potential by the second half of 2020”.
And with markets appearing “to be pricing in a far more durable downturn… we see the rebasing of agri prices as a timely opportunity for consumers and long term investors alike to increase length across the complex”.
The bank recommended a long bet in July Chicago corn call options at $3.80 a bushel – compared with the $3.63 a bushel at which the underlying July futures contract was trading at on Monday – noting an uptick in demand for US exports of the grain.
“Sustained pressure on [Chicago] corn prices and robust external feed demand continues to support the purchases of US origin corn,” with US export sales hitting 1.47m tonnes in the week to March 5, the highest-but-one figure in 14 months.
“It is clear that, even with a record weak real, remaining old crop Brazilian corn is being closely guarded for domestic feed and ethanol use.”
Among oilseeds, JP Morgan stood by forecasts for Kuala Lumpur palm oil futures averaging 2,650 ringgit a tonne over 2020, above the 2,221 on Monday being priced into the benchmark June contract, and indeed a level well above the futures curve stretching out into early 2023.
“Prices in the near term will continue to take cues from the oil and macro markets, before the fundamentals take the driver’s seat through the second half of 2020.”
Price support would be “driven by strong biodiesel demand and production constraints in the top two exporters”, Indonesia and Malaysia.