Soft commodities represent the best bets among ags for price gains in 2020, Rabobank said, with sugar to see “substantial support” from a world output deficit, and coffee from a dip in Central American production.
The bank cautioned that factors such as trade tensions and the hangover from China’s African swine fever outbreak, “incidents that had never been witnessed before”, will “continue to challenge markets in 2020”.
“In an increasingly uncertain world, farmers and consumers alike are becoming accustomed to [commodity] supply and price volatility,” said Stefan Vogel, Rabobank global strategist and head of agri-commodity markets.
“That situation is unlikely to change in 2020.”
Among potential setbacks for next year is a “significant risk of a mild” US recession in the second half, the bank said, adding that it was also “sceptical that a trade truce between the US and China will prove to be sustainable”.
Nonetheless, the bank forecast “a more benign 2020” for Brazil which, poised for “decent” GDP growth of 2% and progress in cutting its budget deficit, would see the real appreciate.
“This can easily translate to stronger support for coffee and sugar prices,” with a stronger real boosting dollar values of commodities such as these in which Brazil is a key player.
(A strengthening real also supports dollar prices of soybeans, of which Brazil is the top exporter, and which Rabobank rated as having better prospects for price gains next year than corn or wheat.)
The coffee and sugar markets also faced "noteworthy deficits in 2020 - conditions not seen for several years, and possible bringing about further price reactions".
Sugar – Rabobank’s most bullish pick among major ags for 2020 – was poised for “substantial support going forward” also helped by ideas of reduced output in the likes of India and Thailand which will drive the world into an output deficit of some 7m tonnes in 2019-20.
Meanwhile, forward energy market values suggested that “ethanol is likely to be very competitive”, and continue to tempt Brazilian cane mills to prioritise output of the biofuel over sugar.
“In case any more sugar is needed out of Brazil, sugar prices will face a quick upside in order to convince mills out of ethanol maximisation,” Rabobank said, forecasting New York raw sugar futures averaging 14.00 cents a pound in the last three months of 2020.
That compares with a current spot price of 12.72 cents a pound, and is above too the 13.20 cents a pound being priced into the October 2020 lot.
‘Over 10m farmers face poverty’
For coffee, the bank forecast spot New York arabica prices averaging 122 cents a pound in the last quarter of 2020, above the 155.95 cents a pound the December 2020 contract was trading at on Wednesday.
For London robusta coffee, spot futures were seen at $1,460 a tonne late next year, a little above the $1,436 a tonne the market was pricing into November 2020 lot.
While forecasting a return to a world production surplus in 2020-21 of 2m bags, following a 3.2m-bag deficit expected for this season, Rabobank said that the surplus was “rather small” for a year which will be an “on” one for Brazil, which sees alternate higher and lower arabica harvests.
“We expect declining production outside of Brazil in 2019-20 and 2020-21, with over 10m farmers facing poverty and some neglecting their farms,” the bank said, forecasting a drop of 5% in Central American output this season.
‘Forecast to trade higher’
Cotton futures were seen poised for gains too, forecast averaging 72 cents a pound in the last three months of next year, above the 68.06 cents a pound being priced by investors into the New York December 2020 contract.
While ample supplies of US cotton from the ongoing harvest are “expected to cap [price] upside through the first half of 2020”, pressure from prices at current levels will drive sowings for 2020 down some 700,000 acres, and cut output back below 20m bales.
Imports by China are also “set to improve both this season and next, despite an expected GDP growth slowdown”, after the country ran down its bloated state inventories.
“Cotton is forecast to trade higher in late 2020.”
Year of two halves
For cocoa futures, the bank was more mixed in its outlook, forecasting London prices at £1,860 a tonne in the last quarter of 2020, above the futures curve, but seeing New York values below, at $2,460 a tonne.
“Rainfall has been unseasonably good” for cocoa plantations in the key West Africa growing region, “with a higher-than usual intercontinental front bringing good rainfall”.
This should prove “sufficient to sustain crops through the dry season and during the arrival of the harmattan winds”.
Nonetheless, global cocoa demand was “forecast to show continued growth in 2020, although at a slower pace than 2019.
“Prices should remain supported until the second quarter of 2020, on strong demand, and then decline slightly, on the back of good production prospects.”