Cocoa bucks ags’ 2013 losses – and to outperform in 2014 too

(AgriMoney) – Cocoa proved the best bet among agricultural commodities for 2013, lifted by expectations of a third successive year of production deficit, and corn the worst, weighed by a record US harvest.

Agricultural commodities fell by 7.7% last year, in terms of the average performance of the main 23 contracts*, in Chicago, New York, London and Paris, plus Kuala Lumpur palm oil and Tokyo rubber, in local currency terms.

That represented a slight underperformance compared with a 5.0% fall in the CRB commodities index and of course compared poorly with the gains from equities, which gained nearly 20%, as measured by the FTSE All World index.

Tokyo shares soared 57%, with New York’s S&P 500 jumping 30%, and London’s FTSE 100 gaining a relatively small 14.4%.

Indeed, many investors appear to have swapped from commodities to shares, a trend blamed for a series of hedge fund closures, and with the year closing with the longest bearish run in hedge fund positioning on records going back to 2006.

Grains out of favour

Chicago corn futures led the decline, tumbling 40% on a front-contract basis, under pressure from a record 355.3m-tonne (13.989bn-bushel) US harvest which replenished, and more, the void in supplies left by the drought-hit 2012 crop.

Ukraine production reached an all-time high too, of 30m tonnes, while South American crops are expected to come in at respectable levels despite a switch among farmers to sowing soybeans.

Wheat fell 22% in Chicago, undermined in part by lower corn prices, which encouraged livestock feeders to switch grains, but also feeling pressure from a record world wheat harvest, which allowed a 7m-tonne rebuild in world inventories, on US Department of Agriculture data.

However, futures fared even worse in Minneapolis, where spring wheat is traded, tumbling 27%, with a particularly weak finish to 2013, weighed by the record Canadian harvest, which is mostly of spring-sown varieties.

Paris wheat futures proved relatively resolute, shedding 16.5%, given some support by the thinnish exportable supplies from the former Soviet Union, typically a source of ample volumes of competitively-priced grain.

Other losers

Back in Chicago, soybeans dropped a more modest 7.5%, with world supplies remaining tight despite a strong US harvest, although this is expected to change when the South American harvest begins in earnest over the next couple of months.

Elsewhere in the oilseeds complex, rapeseed tumbled 19.7% in Paris, undermined by a bumper 2013-14 world harvest, of nearly 70m tonnes, including a record 18.0m tonnes of Canadian canola.

Other notable losers included arabica coffee futures, which dropped 23% in New York, pressed by an unusually large Brazilian crop, for an “off” year in the country’s two-year cycle, and a by recovery in Colombian output as trees matured that were planted in a campaign late in the last decade to reseed with varieties resistant to rust.

Sugar futures extended their long-running declines on both sides of the Atlantic, depressed by a further year of global production surplus, despite a switch by Brazil’s mills to ethanol rather than the sweetener as the destination for the majority of their bumper cane crop.

New York raw sugar futures closed 2013 at 16.41 cents a pound, taking to 50% their fall over the last three years.

Cattle revive

Winners proved harder to find, although cattle prices gained, led by a 10.1% rise in values of Chicago feeder cattle futures, as improved US weather and low grain prices transformed sector prospects.

Better pasture encouraged US cattle farmers to turn to herd rebuilding after a period liquidation encouraged by drought, which had lasted for successive years in parts of the southern ranching area.

Feedlots competed harder for animals too, with lower corn prices boosting profitability hopes.

Cotton futures gained 12.6% in New York, encouraged by improved world economic conditions – important for an industrial, rather than food, commodity – and by a continuation, for this season at least, of China’s state stockpiling programme, viewed as a key prop to values worldwide.

‘Need for prices to move higher’

However, cocoa futures performed best in 2013, soaring 21% in both London and New York, boosted by expanded ideas for the cocoa production deficit in 2012-13, and ideas that output this season and in 2014-15 will fall below consumption.

While demand for cocoa is being underpinned by global economic recovery, output is being constrained by the impact of poor weather in West Africa, the top producing region.

Indeed, many brokers foresee that while prices of most agricultural commodities will be weighed this year by improved supply prospects, those of cocoa are placed for further gains.

Rabobank placed cocoa as its most bullish ag prospect for 2014, saying that “consumption continues to outstrip production, drawing on stocks”, and forecasting a “third consecutive year of production deficit” in 2014-15.

Macquarie, terming cocoa “the only [ag] market expected to be in an outright deficit”, said that “we remain concerned that West Africa will be unable to meet demand needs, despite strong arrivals to date.

“Healthy global grindings and the need for world prices to move higher to encourage producers to invest in supply expansion will see prices turn up in the second half of the year.”

Structurally-driven deficits

Commerzbank flagged that the International Cocoa Organization “had already warned in the early part of this year of structurally driven deficits in the coming years, which helped to lift prices.

“According to the trading house Olam, the cocoa price would have to rise again strongly, despite the increases of recent months, in order to sustainably attract investment to the cocoa sectors of the key cocoa-producing countries.

“Given market deficits and the need to invest in the cocoa sector to keep pace with rising demand in the mid-term, we believe cocoa prices will continue to rise.”

‘Worsen the supply shortage’

Singapore-based Phillip Futures also said that it was “bullish” on the bean, flagging a “tight cocoa market that is plagued with supply deficit and robust demand”.

Cocoa production is limited by the ageing profile of trees in West Africa, the main production region and by weather damage which should reverse a strong start to 2013-14 for arrivals of beans at Ivory Coast ports.

“The slowing down of cocoa bean deliveries will be due to the harvested main crop being adversely affected by previous hot and dry conditions in the Ivory Coast, as well as by the Harmattan,” a dry and dusty wind.

Meanwhile, demand is being spurred by “surging” chocolate consumption in Asia, and in particular in China, where sales rose 6.9% last year according to Euromonitor, which foresees a further 6.6% gin this year

“China is currently a huge untapped market and as China grows economically, we can expect China to be a major threat that may further worsen the supply shortage situation of the cocoa market,” Phillip Futures analyst Vanessa Tan said.