Rabo upbeat on cotton prices, but flags double threat to palm futures

01.09.2016

Rabobank warned over a double threat to palm oil bulls, even as it lifted its price forecasts –while making the opposite move in cotton, cutting price hopes but retaining a bullish outlook.

The bank forecast a revival in palm oil output in Malaysia, the second-ranked producer, of some 13% month on month for August, to about 1.8m tonnes, which would be the strongest figure in 10 months.

"Preliminary surveys for Malaysian production are pointing to a huge month-on-month increase as production ramps up after Eid festivities and adverse production effects to El Nino dissipate," Rabobank said.

The recovery would represent a marked improvement on the 3.5% increase recorded for July, a figure and put output back for showing a more typical seasonal rate of increase to peaks typically recorded in September-October.

Palm oil vs soyoil

Indeed, while Rabobank raised its forecasts for Kuala Lumpur palm oil futures by up to 150 ringgit a tonne - seeing them average 2,400 ringgit a tonne in the October-to-December period, and 2,325 ringgit a tonne through the first three quarters of 2017- that is below levels futures are factoring in.

Even after a fallback from a mid-August highs of 2,668 ringgit a tonne, achieved with the help of the poor Malaysian output figure for July, benchmark Kuala Lumpur futures, currently the November contract, stood at 2,519 ringgit a tonne on Thursday.

Rabobank highlighted too the hindrance to prospects from palm price from the fact that they are already at a discount of only some $30 a tonne to rival vegetable oil soyoil, in the US, a four-year low and down from $95 a tonne in mid-July.

"If palm oil is to maintain its market share to soyoil, it has to widen its discount again to entice and incentivise buyers," said Rabobank, pegging the average gap to soyoil at $125-135 a tonne.

'Bullish longer term'

By contrast, Rabobank restated that it was "bullish longer term" on cotton prices, even as it cut its forecast for New York-traded futures by up to 5 cents a pound, to an average of 68 cents a pound for the October-to-December period, and 69 cents a pound for the first quarter of 2017.

That implies some scope for price recovery, with December futures trading on Thursday at 66.22 cents a pound, and the March lot at 66.53 cents a pound.

Rabobank acknowledged the boost to crop prospects in India and western Texas, the top US cotton producing state, from recent rains, besides pressure from auctions from China's huge state inventories.

However, it termed "significant" the impact of China's auctions in removing some 10m-11m bales from stocks, cutting them to a four-year low of 55m bales.

And globally, "the fundamentals continue to highlight a 2016-17 stock decline of 10% year on year, to 89m bales", equivalent to less than 80% of annual consumption.

A stock-to-use ratio at this level was "last seen in 20122-12, when marketing year prices averaged 90 cents a pound".

'Very good crops'

Elsewhere in New York-traded soft commodities, Rabobank put a neutral call on cocoa prices, saying that the current "tight physical situation" would be resolved in 2016-17 by "very good crops" in West Africa, the key producing region.

However, it was downbeat on raw sugar prices, lifting its estimate for prices by up to 0.4 cents a pound to levels which, at 19.6 cents a pound for the October-to-December period, and 19.0 cents a pound for the first quarter of 2017, were below the futures curve.

October futures were trading on Thursday at 20.18 cents a pound, and the March contract at 20.68 cents a pound.

For coffee too, a small upgrade - of 2 cents a pound to 138 cents a pound in the forecast for average arabica futures prices in the last three months of 2016 – belied a "bearish" outlook, with the December contract on Thursday priced at 148.75 cents a pound.

Damage to Brazilian crops from recent frosts had been "insignificant", the bank said, while flagging "excellent amounts of rainfall in the past three months" in Central America.

"Therefore, we can only remain optimistic about the 2016-17 crops there," Rabobank said, foreseeing a rise of some 600,000 bags year on year in the region's production.


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