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Soft commodities better bet than grains - Rabobank


Rabobank flagged potential for late-2019 headway in soft commodity prices, but was more equivocal on grains, despite seeing potential support for wheat values from hiccups in Argentine wheat exports.


The bank, while lowering price forecasts for many softs, left estimates for all major contracts – cocoa, coffee, cotton and sugar – above levels that markets are currently factoring in, flagging in cotton results of a crop tour showing “small crops and late development.


“Moreover, the tour noted spring planting issues across west Texas,” a key growing area, the bank said, pegging US sowings of the fibre at 13.5m acres, some 400,000 acres short of the US estimate.


Noting potential support too from covering by funds of their substantial net short position, the bank forecast spot New York cotton futures averaging 62 cents a pound in the October-to-December quarter – down 2 cents from their previous estimate, but above the 58.80 cents a pound December futures are trading at.


‘Mildly bullish’

The price estimate – which followed an upbeat forecast too for the fibre from Commerzbank – came as Rabobank also flagged “some reasons to be mildly bullish” on New York raw sugar futures, which is saw averaging 13.1 cents a pound in the fourth quarter.


While down 0.2 cents a pound from the previous estimate, that forecast is more upbeat than expected by investors, with the futures curve suggesting that 13.1 cents a pound will not be reached until early 2021.


The “most obvious” cause for optimism is the Brazilian ethanol market which, in proving “surprisingly strong” is drawing cane away from sugar manufacture.


However, the bank also flagged increased Chinese sugar imports, and the prospect of a “sizeable” world sugar production deficit in 2019-20.


‘Significant deficit’

On coffee – while the forecast for fourth-quarter prices of arabica futures was trimmed by 2 cents to 108 cents a pound, and for London robusta futures by $100 to $1,430 a tonne – the estimates remained above the futures curve.


The bank highlighted “very strong demand” for green coffee, a factor which, alongside a weaker year for Brazilian output, will land the market with a 4.1m bag production deficit in 2019-20.


For cocoa, downgrades to average October-to-December price expectations of $200 a tonne to $2,350 a tonne for New York futures, and £100 a tonne to £1,720 a tonne for London, also remained above levels investors are banking on.


While favourable weather in West Africa has “dampened” worries over 2019-20 supplies, the world remains on course for a “significant” production deficit, pegged at 118,000 tonnes.


‘Multi-year burden’

For grains, however, Rabobank trimmed its price expectations to levels largely in line with futures curves, cutting its fourth-quarter Chicago corn price estimate, for instance, by $0.60 to $3.80 a bushel, only marginally above the level the December lot is trading at.


While flagging potential for the US corn yield “to dial back” from the 169.5 bushels per acre that the US Department of Agriculture has forecast, “cool conditions and recent timely rainfall have likely averted a sub-165 bushels-per-acre” result.


For soybeans, the late-year price outlook was cut by a more modest $0.25 a bushel to $8.75 a bushel, with the bank saying that while US stocks represent “a multi-year burden”, with prices “near or below US farmer cost of production, natural sellers will be scarce” at cheaper levels.


Argentina factor

The Chicago wheat price forecast for the quarter was also cut by $0.25, to $4.75 a bushel, close to the level December futures are trading at, with the bank saying that “lower demand for US wheat will likely keep [futures] subdued for the time being”.


Still, with Argentina’s elections later this year looking increasingly likely to see a return of left wing rule, “the risk of higher export taxes for various agricultural products is increasing.


“If higher export taxes are levied, which could be likely from December onwards,” when the government would change, “the US could see increased export demand in early 2020.”

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