Grains and oilseeds will lead a recovery in ag prices when the depressant of the coronavirus outbreak, “hopefully”, fades, Commonwealth Bank of Australia said, while proving less upbeat on cotton and sugar values.
From a supply perspective, “the starting point for crops in 2020 is substantially different from last season”, CBA agri-commodity strategist Tobin Gorey said, seeing tighter dynamics in many markets.
“There is materially less supply slack than this time last year,” he said, citing in particular availability of feed grains.
“Global feed grain supply will start the season with little in reserve.”
While US corn supply alone “does not suggest this… the rest of the world’s available supply is skinnier”.
World coarse grain stocks will end 2019-20 at 326.6m tonnes, according to US Department of Agriculture data, down nearly 21m tonnes year on year, and the lowest in at least five years.
“The same applies to wheat too,” Mr Gorey said
‘More vulnerable to weather shocks’
Thus grains “enter season 2020 more vulnerable to weather shocks than they have been for several years”, Mr Gorey said, seeing similar dynamics, among oilseeds, in vegetable oil markets.
“Oilseed supply is a step more comfortable in meals, at least.”
In fact, considering the major grains and row crops, cotton “looks like the only one with comfortable supply”.
Such dynamics offer “some idea of how markets might behave if, and hopefully when, the world moves past the Covid-19 epidemic”, which has depressed prices of food commodities as well as, if less so, than industrial raw materials.
“Grains recover faster, oilseeds and cotton not so much.”
‘Odd troublesome holding’
For wheat, CBA said it was “targeting $5.00-6.00 a bushel” for Chicago soft red winter wheat futures by the end of 2019-20, which finishes in May in the US.
That compares with the $5.15 ¾ a bushel at which the May lot was trading at on Friday.
While world wheat stocks are “notionally still high”, more than half of these inventories “are off-market in China”, Mr Gorey said.
“Ex-China inventories are, broadly, neutral, with the odd troublesome holding, like remaining excess inventory” in the US, where he pegged hard red winter wheat stocks as “about 6m tonnes too much”.
For Chicago corn, CBA said that investors should expect prices of $4-4.50 per bushel “some time in 2020”, well above expectations that investors are factoring in.
The futures curve does not see prices topping $4.00 a bushel until summer 2011, and reaching $4.14 ½ a bushel in July 2023.
“The bias in the risks is for higher prices because of thin comfort in global coarse grain inventories.”
For soybeans, CBA forecast that prices “might near $10 a bushel”, assuming that China indeed buys US supplies, as anticipated after January’s phase one trade deal between the two countries.
While US soybean supplies remained “hefty” for now, “China will need to buy some of that inventory at some point”, with its hog herd being rebuilt after the African swine fever crisis.
‘Doubt there is a lot of upside’
Prospects for cotton prices, however, were less bullish, given “stagnant” consumption, which was underpinning expectations for “comfortable” supplies.
“Cotton can lose some acres in 2020 without creating much upward pressure on prices,” Mr Gorey said, although citing Chinese buying of US supplies as “likely to be a source of surprise for the market from time to time”.
For New York raw sugar, Mr Gorey said that prices were “likely to spend much of their time around 14 cents a pound” a level which, while above the spot value of 13.09 cents a pound on Friday, was traded in New York as recently as a week ago.
“Even without the Covid-19 epidemic we still doubt there is a lot of upside because extra sugar is still easy to find [and] capacity still likely exceeds demand”.
The extent of stocks would cushion the market from production deficits expected this season and in 2020-21 too.