Sugar prices are on their way to levels not seen since 2007, Goldman Sachs said, as it flagged a worsening impact on commodities from the maelstrom created by Covid-19, while naming corn as its “best short” bet.
The knock-on effects of the coronavirus pandemic are “creating outcomes which far exceeded out negative views from last month”, the bank said, noting factors including an “extreme lack of liquidity” in precious metals and the price war in oil markets which has driven crude values to four-year lows.
“Demand losses across the complex are now unprecedented,” Goldman said, seeing oil consumption as down some 8m barrels per day, and cutting by $10 per barrel, to $20 per barrel, its forecast for average values of Brent crude on a three-month horizon.
For prices in the ag complex, the dynamics present a double whammy, with many constituents not only facing direct demand losses, but the prospect of lower output costs – which are also being undermined in many major producing countries, such as Brazil, by tumbling currencies.
The weakened oil market outlook will only enhance the pressure on ags used in making biofuels.
‘Best market to be short’
The bank said that “as corn and cotton are the most energy intensive commodities, we would expect them to be hit hardest by oil”.
But, recommending a short bet on May corn futures, it was particularly negative on values of corn, given its demand from beef producers, facing particular pressure from reduced foodservice demand, as well as from bioethanol plants.
“We would expect [corn] to be the best market to be short,” Goldman said, forecasting prices at $3.40 a bushel, on a three-month timescale.
‘Least cyclical grain’
However, it forecast Chicago corn prices at $4.00 a bushel on a 12-month horizon, a level above the futures curve, and indeed foresaw grains, as measured by the Bcom grains subindex, achieving positive returns of 3.4% over that timescale.
Soybean futures, are poised to stand at $8.75 a bushel in a year’s time, above the $8.43 a bushel being priced into the March 2021 contract on Wednesday, with Goldman foreseeing China honouring its phase one trade deal commitments, spurring a “sharp” increase in US exports in the second half of 2020.
“Net, despite the headwinds of a sharply weaker Brazilian real and limited Brazilian storage or crush capacity, we expect the more positive demand picture to help soybean prices outperform corn prices.”
Chicago wheat, meanwhile, having seen its “sell-off… overdone”, will recover to $5.15 a bushel on a three-month horizon, while standing at $5.30 a bushel in a year’s time, a touch ahead of the futures curve.
On the demand side, wheat remains the least cyclical grain given its consumption as a basic staple “with the expanding locust swarms from the Horn of Africa also decimating local crops and helping support seaborne trade.”
‘Extensive downside risks’
In fact, softs were only commodities segment for which Goldman forecast negative returns over the next 12 months, of 7.9% as measured by the Bcom softs subindex, following on from losses of 17% already sustained in 2020.
The poor outlook reflected gloomy expectations for New York raw sugar, for which prices were forecast tumbling to 8.5 cents a pound on a 12-month horizon – well below the level of 11.34 cents a pound being factored in to the May 2021 lot.
Indeed, it is a price not seen on a spot basis since June 2007.
“With oil moving toward our three-month target of $20 per barrel, the ethanol-sugar spread has collapsed, incentivising greater milling of the upcoming Brazilian cane crop for sugar, materially increasing the Brazilian supply outlook for 2020.”
While prices could find short-term support from supply tightness “the new wave of supply presents extensive downside risks once the Indian and Brazilian crops are harvested”.
For cotton, the bank flagged the dent to demand from weakened world economic prospects, with increased Indian cotton area, at a record 1.3m hectares, offering “downside risks to an already oversupplied global cotton market”.
The bank lowered its three-month price outlook to 57 cents a pound, a little below the level investors are pricing in, although the 68 cents a pound expected in 12 months’ time is above the futures curve.
Such a relation was also seen in arabica coffee, for which Goldman released three- and 12-month price outlooks of 100 cents a pound and 125 cents a pound respectively.
While estimating coffee demand as “down circa 10%” thanks to customers eschewing coffee shops amid the Covid-19 outbreak, creating “downside risk” to prices short-term, it also saw “adverse weather creating supply tightness in the Brazilian harvest boosting prices at the start of 2021”.
Upbeat on cocoa
For cocoa, Goldman issued an upbeat price forecast, seeing New York futures at $2,600 in three months’ time, and at $2,700 per tonne in a year – both values well above levels investors are factoring in.
“We see continued strength in cocoa prices from continued growth in Asian demand, and drier weather forecast in West Africa curtailing the April-May harvest.
“Strong Harmattan winds have swept into Cote d’Ivoire from the Sahara, depositing sand on cocoa leaves and lowering soil moisture during the key pod development state.”