The outlook for winter wheat prices is “decidedly bearish”, Societe Generale said, proving downbeat on price prospects for the star of the oilseeds complex – soymeal – too, although seeing some scope for coffee price gains.
The bank lifted its forecast for prices of many grains contacts, after the gain spurred by worries over the impact of dryness on Argentine corn and soybean production, and on the US winter wheat crop.
But the revised forecasts remained, to a large part, below the futures curve with, for instance, an estimate of Chicago corn futures averaging $3.75 a bushel in the last three months of 2018, while upgraded by $0.25, remaining below the $4.08 ½ a bushel at which the December contract was trading at on Friday.
“The recent rally in corn prices has improved farmers’ profitability, which could result in increased acreage in the US and in Brazil,” SocGen said, putting at “neutral to slightly bearish” its rating on prospects for corn values.
However, the bank rated at “decidedly bearish… the outlook for Chicago and Kansas City” winter wheat prices, saying that the recent rally had left values “uncompetitive” in a world export market set to remain dominated by huge Russian supplies.
While raising by $0.25 a bushel to $4.65 a bushel the forecast for Chicago wheat futures in the last three months of this year, the upgraded estimate was well below the $5.46 ¼ a bushel at which the December contract was priced at.
For Kansas City hard red winter wheat, the forecast for average prices in the quarter was kept at $4.43 a bushel despite the recent price surge – with the December lot trading on Friday at $5.78 ¾ a bushel, suggested a loss of some 23% on the way to meet the SocGen forecast.
“Even assuming a drought-induced 20% decline in US winter wheat yields, the US and global wheat markets should remain well supplied,” said SocGen, whose forecasts included an expectation of a fresh record Russian wheat harvest this year, of 85.56m tonnes.
The bank recommended a short bet on September Chicago wheat futures, hedged against a long position in the equivalent contract in Minneapolis spring wheat, prices of which have stayed flat, and which thanks to its particularly high protein level “does not compete head-on with Russian wheat”.
The bank also recommended a short bet on the August soybean crush – in essence, selling soymeal and soyoil, while buying soybeans - seeing Argentina’s drought as not wreaking the dent on the country’s soymeal exports that some investors have forecast.
While forecasting a 24% plunge to 44.0m tonnes in Argentina’s soybean output in 2017-18, SocGen analyst Rajesh Singla flagged that higher global soymeal prices, supercharged by a decline in the peso, offered “an attractive opportunity to Argentinean farmers to reduce their soybean inventories”.
The market could remain “well supplied even if Argentinean soybean production declines to 40m tonnes”.
Soymeal futures in the October-to-December period were pegged at $3.37 a short ton, below the $366.20 a short ton December futures were trading at, although the forecast for soybean futures in the quarter, at $9.90 a bushel, allowed scope for a price fall too from the $10.36 a bushel at which the November lot was priced.
‘Limited downside risk’
However, on soft commodities, adjusted price forecasts were closer to market prices, for instance, a forecast for New York raw sugar futures in the October-to-December period downgraded by 0.3 cent a pound to 14.00 cents a pound pretty much in line with the futures curve.
“We see limited downside risk for sugar prices below 13 cents a pound in 2018,” Mr Singla said, if adding that “upside should also be limited by a well-supplied export market”, and the need for Brazilian prices to remain low enough to incentivise mills to turn more cane into ethanol.
Indeed, the forecast assumes that an estimated world production surplus of 11.24m tonnes in 2018-19 will give way to an excess of a reduced, if still substantial, 4.78m tonnes next season, thanks in the main to a cut of some 5.3m tonnes to 33.9m tonnes in Brazilian output.
Nonetheless, with demand rising too, the stocks-to-use ratio, an importing pricing metric, will ease by 0.1 points to 22.9%.
‘Bearish news priced in’
On coffee, the bank’s forecasts for end-2018 arabica prices of 130 cents a pound and robusta values of $1,764 a tonne, while down 0.05 cents a pound and $110 a tonne respectively, remains ahead of the futures curves.
December arabica futures were trading at 128.80 cents a pound on Friday, with London November robusta coffee futures at $1,800 a tonne.
“Most of the bearish news regarding excess supply for 2018-19 is already priced in,” Mr Singla said, adding that “support from the cost floor and potential supply issues from weather or a decline in sales by farmers should continue to restrict the downside potential in coffee prices.”
The bank estimated at 10-15% the price of coffee above producing costs in major growing countries, “which we see as a justifiable premium for high geographic concentration”.
For New York cotton, SocGen raised its price forecasts by up to 11 cents a pound, taking to 77.0 cents a pound the estimate for average prices in the October-to-December period, marginally behind the 78.50 cents a pound the December contract was trading at.
The bank forecast a balance between support for prices at about 75 cents a pound stemming from “strong” demand for US supplies, and a plethora of negative dynamics.
“Record inventory carry-over from 2016-17, record global production in 2017-18 and the potential for an increase in acreage and yields in 2018-19 should put downward pressure on cotton prices.”