Rabobank signalled that the selling in agricultural commodities thanks to coronavirus “panic” may have been overdone, issuing upbeat price forecasts for many contracts, and saying it was “bullish” on cotton and wheat.
The bank, cutting demand forecasts, acknowledged the setback to ag consumption prospects from the spread of the Covid-19 virus, and measures taken to control it.
However, “when the virus panic has waned, we expect to see a demand recovery”, Rabobank said.
It added that it was maintaining forecasts for Chinese purchases of US agriculture exports, following the countries’ phase one trade deal last month, although said that these targets were “now expected to be fulfilled later”.
‘Keeping prices supported’
Although cutting its forecasts for many agriculture futures, including arabica coffee, corn, soybeans and wheat, Rabobank left its estimates above levels that investors are factoring in.
On wheat – for which the bank forecast Chicago prices averaging $5.50 a bushel in the last three months of this year, ahead of the $5.39 ¾ a bushel being factored into the December futures contract – the bank said it was “bullish”, citing the prospect of “continued export demand and lower year-on-year stocks”.
A “mixed” world production outlook for 2020-21, with prospects for weaker output in the European Union and the US countered by improved prospects for Russia and Ukraine, should mean that world wheats stocks (outside China) continue to fall, “keeping wheat prices supported”.
“Lower US stocks should provide support” for Chicago futures.
For corn, the forecast for average fourth-quarter Chicago prices was cut to $3.85 a bushel - but remained ahead of the $3.76 ¾ a bushel at which the December contract was priced at on Friday.
The bank acknowledged the prospect of growth in US stocks in 2020-21, although its own forecast for US corn sowings this year, at 93.0m acres, is 1.0m acres below the US Department of Agriculture estimate.
However, it added that it was “confident in China’s eventual procurement” of US corn, whether in grain form or as processed into DDGs [distillers’ grains] or ethanol, while flagging too the prospect of a drop in Brazilian exports, thanks to higher demand by domestic biofuel plants.
On soybeans, the bank’s fourth-quarter price forecast, while cut to $9.25 a bushel, also remained above the futures curve, with Chicago’s November lot trading at $9.04 a bushel – even though Rabo forecast US sowings this year at 85.5m acres, 500,000 acres ahead of the USDA figure.
The bank said that it “anticipates eventual Chinese procurement to combine with coronavirus-depressed plantings to support a Chicago rebound” from the spring, with potential for a Chinese-led “demand rebound” in the second half of 2020 to “drive momentum” in futures later on.
However, the bank’s most upbeat call was on cotton, for which it stood by a forecast for New York futures averaging 75 cents a pound in the fourth quarter – well above the 62.55 cents a pound at which the December lot was trading at on Friday.
Rabobank voiced a “bullish outlook” on prices, saying that while Chinese demand “should remain subdued in the short term, while [corona]virus lockdowns exist… as restrictions are lifted import purchases should bounce back sharply”.
Indeed, the phase one trade deal heralds “strong US-China cotton flows in future”, the bank said, seeing prices reach as high as an average of 78 cents a pound in the July-to-September quarter.
“Fundamentals still point toward 2019-20 demand growth, forecast at 1% year on year,” it added, pencilling in growth of 2% next season, to offset largely an increase in production.
Among other soft commodities, the bank trimmed its forecast for New York arabica coffee, but to 120 cents a pound as of the fourth quarter, above the 115.60 cents a pound investors were pricing in to December futures.
Terming “temporary and negligible” the likely impact of Covid-19 on coffee demand, the bank focused on the need for prices to be firm enough to incentivise Central American output later in 2020, besides absorbing the pressure from a potentially large Brazilian harvest.
“The market needs to reward farmers to do a thorough harvest in Central America” late in the year, against a “tight situation” in the market for washed arabicas, as mainly produced in the region.
Sugar was the one ag for which Rabobank saw a “bearish outlook”, citing the prospect of increased sugar production from the 2020-21 Brazilian cane crushing season, as starts in April.
Even so, its forecast for New York raw sugar prices averaging 14.0 cents a pound in the last three months of 2020 was largely in line with the futures curve.