Commodities | Dec 11 2009
By Andrew Nelson
The past year has seen agricultural commodities pulled this way and that by a number of conflicting and volatile trends. The fluctuation of the US dollar, the waxing and waning of macro-economic indicators, quixotic investor sentiment, the ever present ups and downs of the weather and ultimately, by the differences in individual market fundamentals.
Such a mixed environment has resulted in a mixed outcome for agricultural commodities over the course of the year. Grains consistently underperformed, while on the other hand, soft commodities like cocoa and sugar hit multi-decade highs.
Heading into 2010, commodities analysts at Barclays Capital expect to see increasing firmness in soft commodity prices. More importantly, they are also pencilling in some emerging strength in grains, which the team thinks will outperform in terms of price appreciation.
Of all the grains, Barclays likes corn the best right now, noting that inventories remain low across the world’s largest producer/consumers nations, the US and China.
Further helping this outlook are signs of increasing demand for CornEthanol, with Barclays noting that margins are now in positive territory. CornEthanol, is the fastest rising end-use sector for corn in the US. While the EPA has deferred a decision that was initially due this month to the Northern Hemisphere summer as to whether there will be an increase to the US ethanol blend rate from the current 10%, Barclays is expecting a rise in the blend rate. This, in turn, will further support corn.
Feed demand, normally a strong driver, has been the weak link over the course of 2009, but with the bank expecting a recovering global economy, feed demand should also increase. The team also notes that China’s trade balance in corn continues to show an increasing need for imports. While the nation has been a major exporter for decades, Barclays expects to see a continuing decline here as domestic stocks will be increasingly put to domestic uses.
The outlook for soybeans, however, is much more complicated, with an anticipated rebound in global production from the world’s three largest producer-exporters: the US, Brazil and Argentina likely to keep a cap on prices. The team points out that the US has planted a record amount of acreage of soybeans, while Southern Hemisphere output, in the wake of this year’s drought-ridden production, is also set to increase. The recent dryness in Argentina will help, but it won’t be enough to offset what looks to be record Brazilian production.
Barclays believes that Chinese demand will be the lynch of the soybean market in the year ahead and an increase here would certainly provide some much needed upside risk. The team notes that China’s soybean imports hit all-time highs levels last June, but have been trending lower ever since. Into 2010, in-line with the strength of an economic recovery, Barclays expects China’s soybean imports to reverse recent weakness and recover, but only time will tell.
The outlook isn’t quite so positive for wheat, with analysts at Goldman Sachs thinking the robust harvests we had this year on top of already comfortable wheat inventory levels and less than impressive demand growth points to almost certain oversupply in 2010.
The reason the team expects wheat demand growth to remain muted is that the lower level of feed demand has seen buyers switch to more competitively priced corn. Wheat also enjoys no exposure to biofuels demand and has very little leverage to emerging economies.
This low price/low demand environment will most likely lead to less wheat being planted in the year ahead. In fact, Goldman Sachs is predicting US wheat acreage to decline by about 6% next year as wheat as wheat acres are rotated into more profitable corn and soybeans.
However, the team doesn’t think this likely wheat production decline will be a driver for higher prices any time soon, given the expected high inventories heading into the 2010/11 crop year. The team also sees few catalysts for stronger demand growth emerging over the course of the upcoming year, except for maybe a moderate improvement in feed demand as wheat struggles to regain its competitiveness over corn.
On the other hand, Goldman Sachs expects sugar prices to remain high, if volatile over the course of 2010 despite prices rallying strongly to set new 28-year highs over the course of this year . However, the team thinks risks are definitely skewed to the downside beyond the year ahead.
One of the main drives of sugar prices this year was a severely monsoon damaged Indian crop. The fact that it was the second consecutive year of an exceptionally weak harvest, India, the world’s largest sugar consumer, is still a substantial net importer, while the global sugar market remains in a sizeable deficit.
Heavy rains in Brazil are serving to make the production shortfall even more pronounced, especially given an increasingly large share of production is being devoted to ethanol production. Thus the team expects sugar prices to remain high and volatile in the near term given the tight fundamentals. However, over the medium term, Goldman Sachs believes that price risk is skewed to the downside given a likely supply response to current historically high prices in the next set of growing seasons.
