Rabo 'bullish' on arabica, sugar futures - but cautious on grain prices


Rabobank issued "bullish" calls on arabica coffee and sugar prices, and was somewhat upbeat on soybeans too – but remained cautions on grain values, despite upgrading hopes for Chicago wheat futures.

The bank - while slashing its forecasts for New York-traded raw sugar futures by up to 3.0 cents per pound, on a quarter-average basis – left the estimates largely above the depressed levels that investors have sold down the market to, amid hopes for Brazil's cane harvest and a return to a world output surplus.

The forecast for average prices in the last three months of this year, for instance, at 13.9 cents a pound, was above the 13.05 cents a pound that October futures were trading at on Monday.

'Sugar prices to regain some ground'

"We believe prices will not sustainably remain at lower levels," Rabobank said, factoring in resilient values in China, the top sugar importing country, where the premium of Zhengzhou white sugar futures earlier this month touched $585 a tonne over the London contract, a record on data going back to 2006.

Furthermore, prices have reached a low enough level for some Brazilian mills to process cane into ethanol rather than sugar, stemming output of the sweetener, at a time when investors may be overconfident over supplies.

"Current [sugar] prices have not built in much of a supply-related risk premium," Rabobank said.

"We expect sugar prices to regain some ground from their current levels," although a revival "might take several more weeks".

'Rebuild of the quality premium'

For arabica coffee, the bank also cut its forecasts for New York futures, by up to 10 cents a pound, but to levels above those investors are banking on.

The forecast for prices at 135 cents a pound in the last quarter of this year, for instance, was above the 127.90 cents a pound at which December futures were priced at on Monday.

The bank flagged that reports from the Brazilian harvest "suggest that the excellent yields seen last year are unlikely to be repeated", with the crop scoring below-average on quality factors too.

"We believe there will be a rebuild of the quality premium in Brazil."

Indeed, Rabobank added that it was turning a "little bearish" on robusta coffee, generally seen of lower quality, but whose discount to arabica beans last week narrowed to its lowest since at least 2008.

For robusta beans, the bank downgraded its price forecasts by up to $20 a tonne, taking its fourth-quarter estimate to $1,980 a tonne, below the $2,059 a tonne the market was pricing in to November futures.

'Much more bad news will be required'

Also among soft commodities, the bank stuck with cocoa price forecasts a little above the futures curve, saying that the drop in futures near to decade lows had left the market "oversold".

However, in grains, Rabobank was less upbeat on prospects for a recovery in prices, saying that while 2017-18 "might be the first season since 2003-04 when global stocks of most major grains and oilseeds decline… much more bad news will be required to spark a severe price rally".

It stuck with a forecast for Chicago corn futures of $3.65 a bushel for the October-to-December quarter, below the $3.76 Ѕ a bushel at which December futures were trading at, noting weak Brazilian prices and "favourable" conditions for the US crop.

That said, the potential for weather setbacks spurred the prospect of a "period of increased price volatility".

'Stocks might only shrink marginally'

For Chicago wheat, the bank raised its price forecasts by up to $0.25 a bushel, but kept them a touch below the futures curve, seeing them average, for instance, $4.80 a bushel in the last three months of this year.

The December contract was priced at $4.89 ѕ a bushel on Monday.

While prospects for the US hard red spring wheat have deteriorated markedly, and "some yield losses" have beset crops in the European Union and former Soviet Union too, "global [wheat] stocks might only shrink marginally in 2017-18, if at all".

"Despite the various regions that face production issues, we do not yet see a big enough concern to expect a further significant bullish move in Chicago or Paris wheat, and therefore keep our wheat price forecast below the current forward curve."

On soybeans, by contrast, while the bank trimmed its price expectations by up to $0.40 a bushel, ideas of futures averaging $9.40 a bushel in the first three months of 2017 was a little above the $9.29 ј a bushel investors are pricing in.


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