Rabobank 'a little bit bearish' on a cocoa, sees 'gathering storm' in soy


Rabobank said it was “a little bit bearish” on cocoa futures, even as it hiked its forecasts for prices of the bean, leaving coffee as its most bullish bet among agricultural commodities.

The bank hiked by up to $200 a tonne its forecast for New York cocoa prices, on a quarter average basis, citing the boost to sentiment from reduced expectations for output from Cote d’Ivoire, the top producing country.

However, it questioned the extent of the cocoa rally, up 47% in New York this year on a spot contract basis, saying that investors had “moved beyond” expecting a dent to Cote d’Ivoire output next season just from a drop in the guaranteed price to farmers, and were factoring in risk from El Nino too.

It was “too early to expect” an El Nino, which is linked to dry weather in West Africa.

‘Market is overbought’

Rabobank added that for the current, 2017-18 season “we do not necessarily think there is” a production deficit in train.

Arrivals of beans from growers to Cote d’Ivoire ports “continue to be strong, and grinding margins are likely to be affected by the rise in cocoa beans [prices], slowing down the pace of grindings” in the April-to-June and July-to-September quarters.

“For these reasons we the market is overbought at these levels, and we are a feeling a little bit bearish,” said the bank, whose upgraded price forecasts remained behind the futures curve.

For the October-to-December quarter, for instance, the forecast for prices averaging $2,650 a tonne was below the $2,796 a tonne that December futures were trading at.

The forecasts were made before mixed cocoa grind data overnight for the January-to-March period, showing a 1.1% drop in North American volumes to the weakest for the quarter in seven years, but a 7.2% rise in Asian volumes to the highesgt for the period since records began in 2011.

No deterrent

The bank was also somewhat downbeat on prospects for New York sugar futures, for which it cut its price forecasts by up to 1.6 cents a pound, leaving the expectations closer to the futures curve.

“The bear in the room is actually quite big,” Rabobank said, flagging the ineffectiveness of weak prices, which this week hit their lowest since late 2015 in New York, in deterring production.

“Impressions on Indian production keep climbing,” while in Europe, “prices had no effect” in denting sugar beet sowings.

As an extra headwind, a sharp drop in ethanol prices in Brazil has cut the so-called ethanol parity – the point at which mills make equal returns from processing cane into either biofuel or sweetener – had fallen to about 14 cents a pound in sugar terms, down from 16.4 cents a pound at the end of March.

“It the parity were to fall more than 1 cent further, then sugar could start to become attractive again” for mills to produce, meaning yet lower values of the sweetener to deter output.

One potential support to values may come from China, where the effectiveness of crackdowns on legal and illegal imports has left prices 2.5 times higher than international levels, signalling the potential for improved appetite for buy-ins ahead.

Mild depressants

However, in sticking by expectations for arabica coffee prices of 133 cents a pound for the October-to-December quarter, the bank revealed a somewhat bullish outlook, with New York’s December contract trading on Friday at 122.10 cents a pound.

A forecast for London robusta futures at $1,760 a tonne in the last three months of the year was also, a little, above the levels investors are expecting, with the November lot at $1,742 a tonne.

While foreseeing pressure for now from the Brazilian harvest, and soaring Vietnamese robusta exports, the bank flagged the potential for “production losses related to low prices” in producing countries of mild arabica beans.

“We see losses in Central American countries (with the possible exception of Honduras), Papua New Guinea, Guatemala, Kenya and Indonesia… just to mention a few.

“Even Colombia may be affected.”

Grain price outlooks

Among grains, Rabobank nudged higher its forecast for Chicago corn futures by up to $0.10 a bushel but, at $3.75 a bushel for the October-to-December period, the forecast was below the $4.05 ¾ a bushels the market was pricing into the December contract on Friday.

The bank said it was less downbeat than officials on US corn sowings prospects this year, pegging area at 89m acres, 1.0m acres above the US Department of Agriculture estimate.

For wheat, it stood by expectations for Chicago prices at $4.70 a bushel in the October-to-December quarter, well below the futures curve, noting that “conditions have largely been favourable so far” for winter crops in Europe and the former Soviet Union, if not the US.

‘Gathering storm’

For soybeans, the forecast for fourth-quarter prices was nudge $0.10 higher to $10.10 a bushel, but remained below the $10.36 being priced in to the November contract.

For now, “a heavy US soybean balance sheet benefited from recent higher export and crushing demand”, the bank said.

However, the market faces a “gathering storm of bearish fundamentals”, not least the threat of Chinese tariffs on imports from the US.

“If import duties were enacted… we expect to see a significant downward correction, of perhaps 10%, in Chicago, driven by an overreaction of long funds,” although this would “present a buying opportunity”.


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