Commodities | Jan 24 2011
By Chris Shaw
2010 was marked by widespread, weather related downgrades to production in agricultural markets. This meant an erosion in global stockpiles to historically tight levels. As Commonwealth Bank agri commodities analyst Luke Mathews points out, this combined with resilient demand, saw prices surge higher over the year.
Price strength has been broad based, reflecting a tightening in both grain seed and oil seed supplies and low stocks in sugar, cotton and coffee as well. This contrasts to the agricultural commodity price spike in 2007/08, when supply of soft commodities was still at comfortable levels.
Given the tightness in supply, Mathews suggests it is understandable the CBA Rural Commodity Price Index has moved beyond its 2007/08 peak, as food price inflation is real and has become a concern for policy makers worldwide.
At present, Mathews suggests high prices are needed to achieve two main objectives – the rationing of commodity demand and an increase in the planting area for most commodities. This second objective creates its own issue, as all commodities are chasing an increase in planted area, meaning the battle to achieve this additional area should be the most intense in history.
Given such an environment, Mathews expects strong agricultural commodity prices will continue over the next two years, with further gains possible in the first half of 2011 if the market is concerned about area planted or any La Nina related weather issues.
Within the agricultural commodity complex, Mathews favours corn, while he suggests global wheat prices have the potential to rally if production disappoints. Cotton prices have the most downside risk thanks to an expectation of a production rebound in the coming year.
Looking at each market specifically, Mathews notes while current global wheat supply is not particularly tight, this overlooks three important factors. The first is a higher than normal proportion of current supply is of poorer quality, making it only suitable for stockfeed.
As well, Mathews notes unfavourable weather means supply from major milling wheat exporters such as Australia, Canada and Russia is lower than normal, while the production outlook for the upcoming season is uncertain because of poor early season conditions in many markets.
Mathews expects global wheat consumption will increase by 1.7% in 2011/12 to a record 674 million tonnes, driven primarily by an increase in stockfeed use. A production deficit of around 15 million tonnes is forecast for 2011/12, meaning global stocks will be drawn down to 163 million tonnes.
This should push prices higher over the next 6-12 months predicts Mathews, though further gains beyond this timeframe may be difficult to achieve given current pricing appears to already account for a tightening in global availability.
Mathews is forecasting CBOT (Chicago Board of Trade) wheat prices in US cents per bushel terms of 809c in 2011 and 690c in 2012, up from 583c in 2010.
While corn has enjoyed two consecutive record crops globally, these have not been enough to satisfy strong grain demand growth of 3.4% per annum. This growth is being driven primarily by a booming ethanol market.
The strength of demand means global corn inventories are forecast to fall to a four year record low of 127 million tonnes, this supply issue being compounded by limited world barley supplies. The combination of tight supplies and production downgrades for the likes of Argentina leads Mathews to suggest corn prices are likely to remain strong.
Following the upcoming planting season Mathews sees scope for corn prices to moderate, though he is forecasting CBOT prices of 654c in 2011 and 552c in FY12 in US cents per bushel terms, which compares to a price of 434c in 2010.
Soybean inventories appear comfortable but Mathews notes consumption has grown by 4.3% per annum since 1990/91. This reflects increases in Chinese import demand of 15% per annum over the past five years.
This demand means inventory levels are not as substantial as they appear, and with La Nina likely to impact on crops in South America in particular, there is scope for supply to tighten further in the view of Mathews.
Prices should rise to reflect this, Mathews forecasting CBOT soybean prices of 1,254c in 2011 and 977c in 2012 in US cents per bushel terms. This compares to a price of 1,059c in 2010.
In cotton, Mathews notes the current strength in prices reflects very tight global stocks for the second year in succession, which is a function of resilient demand. China has been the driver of this, as its raw cotton imports rose by 38% in 2010/11, so pushing down US inventories.
Tight supplies mean production needs to increase in coming seasons, something Mathews expects will occur. This will rebuild inventories, so placing downward pressure on prices over the coming two seasons in his view.
In US cents per pound terms Mathews is forecasting cotton prices of 117.7c this year and 77.5c in 2012, which compares to a 2010 price of 95.8c per pound.
Higher cotton prices have helped wool prices, as has a decline in supply from Australia given an increased focus on sheep meat production. This shift suggests Australian wool production is unlikely to recover over the next few seasons, meaning a continued tight market.
Current high prices mean additional upside price potential is constrained, Mathews forecasting prices of $11 this year and $8.80 in 2012 in Australian dollars per kilogram terms. This compares to a 2010 price of $9.10 per kilo.
Sugar prices are currently high, Mathews seeing this as reflecting a continued tight supply market on the back of consecutive failed Indian monsoon periods and unfavourable weather in other producing regions.
India remains the main driver of prices in coming months according to Mathews, especially given dry conditions in Brazil suggest production growth in that country will stagnate. China is also becoming increasingly important on the demand side as it shifts to becoming the world's most important importer.
Sugar prices should remain well supported in the coming year in the view of Mathews, before coming under pressure in 2012 as the global production response intensifies. Mathews is forecasting sugar prices in US cents per pound terms of 25.9c in 2011 and 17c in 2012, compared to 22.6c in 2010.
The rain in Australia has allowed beef producers to rebuild herds following years of de-stocking, which resulted in lower production and higher prices. This rebuilding trend should continue according to Mathews, though higher feed grain prices increases the risk of some liquidation of the global cattle herd.
Mathews is forecasting beef prices in Australian dollar per kilogram of $3.70 this year and $3.40 in 2012, which compares to a price of $3.60 per kilo in 2010.
