Ag commodities 'seem to be in early days of a bull market'

04.10.2017

Farm commodities appear to be "in the early deals of a bull market", according to the operator of the Bcom index, proving particularly upbeat over prospects for corn, soybean and wheat prices.

Bloomberg Intelligence acknowledged that the depression in the Bcom agriculture index, as measured on a spot basis, was reaching "historic extremes" in terms of its weak performance.

"Since 1991, the 52-week rate of change in the Bloomberg agriculture spot index has never been lower for longer in a four-year period," the business said, highlighting the weight on prices in particular from a cool US August which, in boosting US row crop yields, undermined values.

However, the extent of the downturn represented a contrarian buy signal, Bloomberg Intelligence (BI), said, saying that "agriculture prices are about as buried as they get" and that "price gains are likely for agricultural commodities" in the newly-started October-to-December quarter.

The comments come amid some recovery in hedge fund sentiment towards the sector, with managed money returning to a net long in major ag contracts last week, although many commentators remain cautious over prospects for price gains given large world supplies of many crops.

 'Early days of a bull market'

BI's forecast reflected in part an assessment of demand exceeding supply in many crops, with commentators such as the International Grains Council, for instance, seeing a drop in world grain stocks this year, albeit to still-high levels.

In the July-to-September period, "primary demand and supply drivers", as measured by Bloomberg Intelligence, "held above par [for] the first quarter in six years".

However, the index operator highlighted in particular the deep nature of the so-called contango in futures – in which prices of distant contracts exceed those for spot lots, "indicating little incentive to sell", and indeed rewarding producers for storing crop instead.

The steepness of the contango in ags is the steepest since August 2006, after which the Bcom ag index rallied 140% to a peak in 2008.

"Futures curves signal agriculture prices are establishing a bottom," Bloomberg Intelligence senior analyst Mike McGlone said, adding that "agriculture appears to be in the early days of a bull market".

'Potential for historic recovery'

Movements in the futures curve had been particularly extreme in sugar which, after providing index investors with gains last year, had "mean-reverted, taking back 2016's advance", and meaning particularly negative returns for "total return" investors rolling from spot contracts to more distant ones.

However, Mr McGlone was particularly upbeat over prospects for soybean prices, flagging a positive chart signal, in an potential inverted head-and-shoulders pattern, and a level of US stocks which was, while at a 10-year high, low relative to world demand.

"It's more significant relative to global consumption. That longer-term trend is down," he said, pegging it at 12%, down from a high of nearly 18% in 2007.

For corn there was the "potential for historic recovery" in prices, which were "likely to approach $5 a bushel… based on historical analysis of the 36-month rate of price changes and demand versus supply".

In wheat, meanwhile, a "rally may be just beginning", he said, saying that a focus on large world wheat stocks "misses what matters – burgeoning [US] exports.

"With 56% of production on pace for export in 2017, the highest in six years, domestic supply matters less."


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