(Agrimoney) – It’s always darkest before dawn, they say.
Which could offer hope to agricultural commodity investors, given the downbeat broker forecasts for prices of most of them next year, the latest coming from ABN Amro, which said that grain and soybean values would “remain under pressure”.
Meanwhile, also on the gloomy side, the Financial Times flagged an “ugly new milestone” for commodities as a whole, with all but one of the 22 contracts in the Bloomberg Commodity Index currently on track to show losses for 2015.
(The one exception is New York-listed cotton, with a gain of 3.6% so far this year.
Arabica coffee is the worst-performing ag, down 36%, with natural gas’s 50% tumble making it the biggest loser amongst the 22 commodities.)
The amount of money following the Bloomberg index has fallen from $400bn at its peak to $219.5bn, according to RBC Capital Markets.
“We have seen a fundamental change in investor attitude towards commodities as an asset class,” said Christophe Salmon, chief financial officer of commodities trading giant Trafigura, which has decided to wind down a flagship metals hedge fund after year-end.
‘Buying opportunities’
Still, going back to the “darkest before dawn” idea, Tregg Cronin at Halo Commodity Company said that the FT report, and its kin, were “precisely the kind of articles that detail and accompany major turning points.
“Individual markets continue to present challenges from crude oil to corn to cattle,
“But the asset class as a whole is presenting buying opportunities for long-term investors, especially as we transition from El Nino to a possible La Nina weather scenario.”
La Nina can represent a far bigger threat to grains production than El Nino, often bringing for instance hot and dry summers to the US Midwest (as ABN actually pointed out).
‘Already baked in’
Sure the “arrival of the first US interest rate increase in nine years by the Federal Reserve has many commodity investors awaiting still weaker prices”, Mr Cronin said.
After all, higher US rates tend to mean a strong dollar, which undermines values of dollar-denominated exports such as many commodities, besides bringing tightened purse strings.
“But the first interest rate hike has accompanied positive commodity returns during the last several tightening monetary environments,” Mr Cronin said.
“Rising interest rates has been baked into price since the threat began last summer.”
‘Growing concern’
Whether investors agree with that analysis or not, the ag market is presenting some short-term causes for at least less pessimism over prices, with production worries continuing to mount, particularly in thesoybean market, thanks to persistent dryness in parts of Brazil.
Indeed, influential analyst Michael Cordonnier became the latest commentator to cut hopes for Brazilian output, by 2m tonnes to 97m tonnes.
Benson Quinn Commodities flagged “growing concern in central and northern Brazil as recent forecasts calling for moisture haven’t materialised”.
At Chicago-based Futures International, Terry Reilly said that Brazil is too wet in the south and too dry in the central and north eastern growing regions.
“Dry pockets of Brazil’s major soybean producing areas are starting to underpin soybean futures.”
CHS Hedging said that “Mato Grosso, the top producing soybean state in Brazil is experiencing quality issues in the northern areas due to a lack of moisture,” adding that “isolated showers and above average temperatures are seen into mid-week”.
Prices to rise?
Even Richard Feltes at RJ O’Brien, who hasn’t been the most bullish commentator of late, said that the “mounting concern over 2016 Brazilian soybean production prospects”, coupled with the fact that hedge funds as positioned on the short side, “suggest the potential for futures to retest the early-December high” of $9.10 a bushel.
“Importantly, modest declines in 2016 Brazil soy production may prompt managed fund short-covering and even 1m-2m tonnes of additional 2015-16 US soy export demand.”
That said, “it will not tighten either the US or global soy balance table enough to trigger move above low $9.00-a-bushel futures,” he added, recommending farmers to sell into rallies.
18-month high
Still, Chicago soybean futures have some way to go before that kind of debate becomes relevant, gaining 0.3% higher to $8.94 a bushel for March delivery as of 09:30 UK time (03:30 Chicago time).
The oilseed was helped by higher prices of soy products too, with soyoil for March up 0.4% at 31.16 cents a pound, underpinned by further gains in rival vegetable oil palm oil, which gained 1.2% to 2,472 ringgit a tonne in Kuala Lumpur.
That was the highest for a benchmark contract since June last year, gaining support from concerns over the dent to production in both Indonesia and Malaysia from dryness blamed on El Nino.
A US Department of Agriculture report last week pointed out that rainfall in drought-affected parts of Indonesia, “averaged between 280mm-650mm below required levels during the entire [June-to-October] period.
“This equates to rainfall being 40-87% below the minimum needed to sustain normal yields,” and was experienced by an estimated 67% of Indonesia’s mature oil palm area.
Signally, the USDA also flagged that “palm oil yields typically decline 4-12 months after a stress event has occurred”.
‘Lacklustre export demand’
Back in Chicago, corn followed soybeans in showing small gains, up 0.1% at $3.72 ¼ a bushel for March delivery, also given some support by Brazilian dryness and heat fears, which could hurt yields if occurring during the pollination period.
“The growing story of hotter temperatures in Brazil could warrant some attention,” said Benson Quinn Commodities said.
That said, the broker also noted that US export demand “continues to be lacklustre to non-existent while domestic cash is fading on negative ethanol margins and the holiday lag”.
Indeed, there is more talk of US farmer selling, in soybeans as well as corn, while on US exports, although data on Monday showed shipments last week of 718,888 tonnes, ahead of expectations of at best 550,000 tonnes, volumes are “still behind the pace required” to meet the USDA forecast for the whole of 2015-16.
That implies a weekly pace of 970,000 tonnes a week.
‘Large stocks and soft demand’
Wheat futures, meanwhile, nudged 0.1% higher to $4.79 ¼ a bushel, helped by ideas that even though Argentina looks like coming back harder into exports, following the ditching of shipment taxes on the grain, its supplies may not meet the specifications of all buyers.
“I expect Argentine exporters will have to find a home for 3m-4m tonnes of production, but the overall quality of this production may not be very good,” Benson Quinn Commodities said.
Still, CHS said that “large stocks and soft demand continue to be the underlying factors for soft wheat futures”.
And there is of course the issue of a potential ditching of Russia’s export tax too to factor in.
