Ag price falls have gone far enough - except in cotton, says Rabo


The drop in ag commodity prices – bar cotton – has gone far enough, Rabobank said, foreseeing "marginal support" for wheat futures, "bullish" prospects for cocoa and sugar, and scope for coffee price gains too.

The bank downgraded price expectations for many contracts, including wheat, for which it cut forecasts for quarter-average prices in Chicago by up to $0.40 a bushel, and in Paris by up to E0.15 a tonne.

Nonetheless, the reduced price forecasts - which for the October-to-December quarter stood at $4.60 a bushel for Chicago wheat and E170 a tonne for Paris – remained above the levels that markets are pricing in with December contracts standing at $4.32 Ѕ a bushel in Chicago on Thursday, and E160.50 a tonne in Paris.

The drop in wheat futures to contract lows this week reflected "seasonal" factors, the bank said, "as major harvests progress at pace without issue".

In fact, prices should see "marginal support going forward, driven by incentives to carry physical grain, and the commercial unwinding of short positions", Rabobank said, in the second positive comments within 24 hours on wheat futures, following a sanguine outlook from Commerzbank.

Corn crop setbacks

Rabobank flagged some hope for gains in corn prices too, sticking with a forecast for Chicago prices averaging $3.70 a bushel in the last three months of this year, ahead of the $3.56 ј a bushel that the December contract was trading at.

The bank flagged the potential from heat and dryness to Ukraine's harvest, which it pegged at 25m-26m tonnes, behind a US Department of Agriculture forecast of 28m tonnes, while seeing the latest Argentine harvest at 39.5m tonnes, 1.5m tonnes below the USDA estimate.

The latest Brazilian crop was put at 98m tonnes, 500,000 tonnes behind the USDA estimate.

For soybeans, prices were forecast averaging $9.50 a bushel in the October-to-December period, a touch higher than the $941 Ѕ a bushel suggested by November futures.

'Harvest disruptions ahead'

However, the bank was more upbeat on prospects for some soft commodities, saying it had a "bullish view" on sugar prices, noting the potential for Indian imports, and for cane harvest setbacks in Brazil as the wet season begins in the key Centre South region.

"The usual start of the rainy season is only around the corner, typically during September," Rabobank said, adding that "we are expecting to see some harvest disruptions" and a lower level of sugars in cane.

Sugar prices will also need to be above current levels encourage European farmers to stick with beet rather than reverting to wheat, and "encourage enough [beet] planting to allow for an export surplus in the European Union from the October-to-December quarter of 2018 onwards".

'Very high grindings'

The bank also said it was "bullish" on cocoa, saying there was "not a clear fundamental reason" for weakness in prices of the bean this month, with demand "strong" and likely to remain so.

"Grindings came in very high for the April-to-June quarter, and they are expected to remain very high in the July-to-September quarter, as processing margins are very high by historical standards."

Indeed, chocolate sales growth in the US had accelerated to 2.8% in the last four weeks, according to IRI-Bloomberg Intelligence data, while being up 1.4% over the past year.

In another upbeat sign of demand, "there is news of factory expansion plans and companies considering new projects, which points to current capacity being near full usage."

'Volatility simply too cheap'

For coffee, the bank stood by expectations of prices averaging 137 cents a pound in the last three months of 2017, ahead of the 129.05 cent a pound the market is pricing in to New York's December contract.

"Trees in Honduras are showing signs of stress after the last bumper crop," which has helped shore up world arabica supplies overall.

In Brazil, the outbreak of the coffee borer beetle may "pose an increasing problem", with the prospect of the country's key, and weather-dependent, flowering period to factor in too.

Indeed, the bank was it was "surprised" by a decline in implied volatility levels in options markets, saying that "arabica volatility simply looks too cheap".

'Bulls should be running for the hills'

However, on cotton, the bank issued bearish comments, as it cut its price forecast for the last October-to-December quarter by 3 cents to 65 cents a pound, behind the 68.74 cents a pound at which December futures were priced.

"Cotton bulls should be running for the hills," Rabobank said, flagging forecasts that while world cotton stocks will remain stable in 2017-18, that disguises a shift in supplies from China to other countries, where inventories, in being available to the world market, are more price sensitive.

The shift of cotton "from China's internal stockpile to global exporters drive an 8m-bale hike in available stocks, a factor which will continue to weigh on prices into 2018".


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