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Inflation fears spurring index funds to buy into ags, says Rabobank


Index fund buying, spurred by inflation worries, is underpinning the price of agricultural commodities, Rabobank said, even as it unveiled largely downbeat forecasts for futures in the main contracts.


While seeing a retreat in US corn and soybean yield hopes, and dollar softness, as supporting August’s revival in agricultural commodity prices, “the main bullish influence was probably funds”, the bank said.


Building on comments reported by Agrimoney on Monday, the bank said that “commodity index funds have been buying across ags for the last eight consecutive weeks, as investors look to hedge inflation and even equities”.


One traditional investment in such strategies, gold, “is already very expensive”, while another, real estate, is “illiquid”.


‘Bullish factor’

The bank added that it expected index funds – which track indexes such as the Bcom ag subindex, which is up 4.0% so far this month at its highest in five months - “to continue buying , as concerns about the size and length of the monetary and fiscal stimulus will continue”.


The funds “are investing on future inflation concerns and concerns about the value of money”, Rabobank said, adding that “this trend may continue for the foreseeable future”.


The trend “should represent a minor, but steady, bullish factor in ag commodities”.


Chicago vs Paris

Nonetheless, the bank issued a largely downbeat series of forecasts for ag prices for the rest of 2020, standing by, for instance, a forecast for average Chicago wheat futures of $5.25 a bushel for the October-to-December quarter, below the 5.33 a bushel at which the December lot was priced on Wednesday.


Chicago prices “should come under pressure as the northern hemisphere harvests weigh on the market,” Rabobank said, adding that it had a “bearish outlook” on values, although adding it was “bullish” on Paris futures, amid a weakened European harvest.


For Paris wheat, prices were forecast averaging E190 per tonne in the fourth quarter, ahead of the E183.50 per tonne that the December lot was trading at.


‘The big question mark’

And for many other ags, the bank raised its fourth-quarter price forecasts, but to levels below those investors are factoring in.


For Chicago corn, the price estimate was nudged $0.05 a bushel higher to $3.45 a bushel, but remained below the $3.51 ¼ a bushel the December lot was trading at, with the bank saying that “demand for US corn will remain the big question mark”.


For Chicago soybeans, the forecast was raised by $0.17 per bushel to $8.97 per bushel, but remained well below levels above $9.20 a bushel suggested by the futures curve.


With the US harvest to kick-off in mid-September, bringing extra supplies, “we take a slightly bearish outlook for the coming weeks,” with $9.40 a bushel expected to represent a “strong upward barrier” to prices.


‘Particularly crowded export space’

Among soft commodities, the bank raised by 0.5 cents a pound, to 11.5 cents a pound, its forecast for average fourth-quarter prices of New York raw sugar futures, but this remains approaching 1.5 cents.


Rabo noted “relatively bearish fundamentals” for the sweetener, with India poised for “particularly promising” output in 2020-21, pegged at 33.5m tonnes, sufficient to support more than 5m tonnes of exports.


And for cotton, the bank talked of a market which had proved able to “defy gravity”, even as it nudged by 1 cents higher, to 56 cents a pound, its forecasts for average New York prices in the fourth quarter.


It noted a “heavy fundamental outlook globally” for cotton, with demand hurt by the Covid-19 pandemic, and stocks expansion focused outside of the key import market of China, “making for a particularly crowded export space”.


‘Outstanding in quantity and quality’

On coffee, the bank expanded on caution in its latest sector report over prospects for arabica prices, saying it had a “bearish outlook” on the bean, after Brazilian harvest “outstanding in quantity and quality”.


While raising by 2 cents a pound to 112 cents a pound its forecast for average New York prices in the October-to-December quarter, that remained below the 126.45 cents a pound being factored in to the December lot on Wednesday.


“The possibility of a trickle becoming a river,” in terms of increased supplies of Brazilian beans being placed into certified exchange stocks, “should limit any price upside to 130 cents a pound in the December contract”.


For robusta, for which the November lot was trading at $1,439 a tonne, the prospect of delivery of Brazilian beans should also limit “upside to $1,500 a tonne” for the contract, despite talk of a weaker harvest this year in Vietnam, the top producer of the variety.

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