SocGen cautious on ag prices, despite corn, coffee hopes

Societe Generale issued a relatively downbeat forecast for agricultural commodity prices, despite recommending that corn price weakness “should be used as a buying opportunity”, and hiking its outlook for coffee futures.

The bank, while saying its risk-adjusted model suggested that agriculture and livestock futures should account for 32.5% of a long-only commodities portfolio, recommended exposure of just 27.5%, preferring prospects for energy and precious metals prices instead.

The move compares with a Goldman Sachs forecast earlier this week that crop prices, as measured by their element of the S&P GSCI enhanced commodity index, will return a positive 4.4% over the next 12 months, lagging energy, which the bank expects to offer a 10.2% return.

However, Goldman forecast the livestock complex giving a negative return of 6.2%, making it the worst performer in commodities, behind also precious and industrial metals.

‘Challenging export markets’

SocGen said that its recommendation of “underweighting agriculture and livestock” reflected the “relative performance” outlook for the segment, with the bank particularly bearish on futures in soybeans, which it saw falling below $10 a bushel until 2021, and lean hogs.

The bank was also a little below the market, for instance, on expectations for Chicago corn futures, which it saw averaging $3.50 a bushel in the April-to-June quarter, beneath the $3.66 a bushel being priced into the May contract.

“We prefer to remain below the forward curve amid expectations of challenging export markets,” SocGen analyst Rajesh Singla said.

However, it flagged “limited downside” for prices below its forecast, estimating that US farmers will cut corn sowings by 5.5m acres next year, largely in favour of soybeans, so cutting hopes for production of the grain.

Indeed, it said that spot corn prices, at some $3.50 a bushel, are below costs of production of $3.50-3.80 a bushel in South America as well as the US.

Given the price disincentive from growing the crop, “we believe that severe weakness in corn prices should be used as a buying opportunity and may lead to a substantial shift in acres from corn to other crops during 2017-18,” Mr Singla said.

More active selling

Much corn ground is expected to move to soybeans, in which SocGen slashed by up to $0.89 a bushel its forecasts for Chicago prices next year, leaving the estimates well below the futures curve.

For the July-to-September quarter, for instance, the bank forecast futures averaging $9.30 a bushel – more than $1.20 a bushel below the price that July and August 2017 contracts are valued at.

The bank cited, besides the potential for “significant increase” in US soybean sowings next year, the potential for enhanced competition from South American farmers, who have so far enjoyed largely favourable weather for their crops to be harvested early in 2017.

“More active selling” of soybeans by South American farmers, enjoying the boost to domestic prices from currency retreats, “should leave little scope for further growth in US soybean exports”, Mr Singla said.

‘Wait-and-see approach’

By contrast, the bank hiked its forecasts for New York arabica coffee futures by up to 34 cents a  pound, seeing them end 2017 at 173 cents a pound, a little above the level that investors are pricing in.

While forecasting a further world arabica production surplus of 4.6m bags in 2017-18, albeit below the 8.5m bags expected for this season, supplies will be squeezed by tightness in the robusta market.

For coffee overall, the global stocks-to-use ratio, a key pricing metric for commodities, “is likely to fall from 21.1% in 2016-17 to 18.0% in 2017-18… similar to 2011-12, when arabica prices averaged 200 cents a pound”, Mr Singla said.

He added that futures could receive “further support” from a continued reluctance, in coffee, by Brazilian farmers to sell coffee.

“With lower inventories and a large domestic market, we believe Brazilian farmers will continue to adopt a wait-and-see approach and hold stocks in anticipation of higher prices.”

Sugar, wheat price prospects

For sugar, SocGen was more upbeat than investors too, seeing New York raw sugar futures end 2017 at about 19.5 cents a pound, compared with the 18.23 cents a pound being priced in by March 2018 futures on Thursday.

“Global stock-to-use should fall from 19.6% in 2016-17 to 18.9% in 2017-18, similar to the level in 2010-11, when sugar prices touched 35.31 cents a pound,” although this time without a likely extra boost from Indian sugar imports.

The bank stated a “neutral” stance on prospects for the cotton market, and for wheat, even though its forecasts for Chicago futures in the grain were downgraded by up to t$0.35 a bushel to levels below the futures curve – particularly for late 2017.

Chicago wheat futures were seen ending next year at some $4.30 a bushel, more than $0.50 a bushel below the actual price of the December 2017 contract.

While US farmers are likely to cut winter wheat sowings substantially, “EU production is likely to recover during 2017-18”, after a rain-affected harvest this year.

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