Rally in agricultural commodity prices not over yet, says JP Morgan


Agriculture markets, the best performer in commodities so far this year, are poised for further gains, JP Morgan said, nudging higher price forecast for many contracts, with sugar and wheat among bullish bets.

The bank said it was staying “constructive across the agri commodity complex” in price terms, even after a gain of 5% in values so far in 2018, driven by the establishment of “weather premiums… across grain and oilseed markets.

“We see further upside price potential ahead, as long term rainfall forecasts offer little respite for stressed crops,” as the markets approach March, a “pivotal period, that will ultimately determine Latam production potential, while field work will be underway for [northern hemisphere] spring crop planting”.

Market concerns have centred on dry weather in Argentina, the main exporter of soymeal, and in the US southern Plains, a major winter wheat-growing area.

‘Additional mean reversion in prices’

The bank added: “There is scope for additional mean reversion in prices across the complex, particularly with a backdrop of synchronised global growth and the return of inflation.”

Volatility will also prove “heightened” as markets move into March, “particularly as open interest is on the rise, and agri commodity performance is improving, attracting the attention of investors”.

The bank raised its price forecasts for Chicago corn futures, on a quarter-average basis, by up to $0.10 a bushel, with those for wheat upgraded by up to $0.15 a bushel, taking the forecasts for the October-to-December period to $3.80 a bushel at $4.80 a bushel respectively.

Among soft commodities, forecasts for New York cotton prices were lifted by up to 5 cents a pound, to 74.00 cents a pound for the fourth quarter.

Nonetheless, the price forecasts for all three commodities remained below levels that investors are already factoring in, of $3.97 a bushel for corn, $5.23 ¼ a bushel for wheat and 75.54 cents a pound for cotton, December basis.

‘Limited downside price risk’

Still, JP Morgan flagged that a trade that it had urged two weeks ago, of spreading a long bet in Chicago call options for May against a short bet in pus, was already showing gains.

“There is limited downside price risk for Chicago wheat prices in the short term in our view, with drought conditions intensifying across the south west Plains in the US, and a disproportionate dependence on Russian origin exports.”

Meanwhile, there was the potential for a “rising weather premium through March/April”, with weather risks to “remain front of mind over the coming months, likely overshadowing the lack of export competitiveness outside of Russia”.

‘Value in sugar prices’

Sugar is the other ag in which JP Morgan has recommended a single commodity bet, of a long position in July call options.

“We continue to see value in sugar prices at current levels for consumers and note our expectations for the correlation between the Ice 11 [New York raw sugar futures price] and oil prices to rise from the April-to-June quarter of 2018.”

The bank stuck by a forecast of raw sugar futures averaging 17.00 cents a pound for the October-to-December quarter, a price well above the current futures curve.

Supply revisions

The price forecast factored in a downgrade of 1m tonnes, to 3m tonnes, in the estimate for the world sugar production surplus in 2018-19, reflecting a downgrade of some 1.1m tonnes to 32.6m tonnes in the forecast for output of the sweetener in Brazil’s key Centre South region.

Other key forecasts included an increase to 3m bales in the world output deficit forecast for sugar in 2017-18, on a raised consumption estimate, to 121.2m bales.

“Global cotton ending stocks are expected to contract by to 84.6m bales, the lowest level since 2011-12.”

For corn, the bank nudged higher to 91m acres its forecast for US sowings this year, with output pegged at 14.53bn bushels.

For soybeans, the acreage forecast was lifted by some 1m acers, also to 91m acres, with the yield pencilled in at 49 bushels per acre.


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