(Agrimoney) – The slump in crop markets is approaching its end, Goldman Sachs said – but the bank’s outlook was at odds with investor expectations of a rebound ahead, and forecast that the washout in livestock has further to go.
The bank, which has been downbeat on commodity price prospects for more than a year, maintained a, “underweight” recommendation on the raw materials as a whole, saying that curbs on supplies were “still insufficient” to offset sagging demand.
Nonetheless, after the declines of the last month, the bank cut to minus 1.0%, from minus 10.0%, its forecast for returns from commodities, as measured by the S&P GSCI Enhanced Commodity Index, on a 12-month horizon.
This follows negative returns of 24% so far this year, following the negative 31% recorded for 2014.
‘Sharp pick-up in selling’
And for crops, the drop will be just 0.3% over the next 12 months, Goldman forecast – a marked improvement on the negative 16.5% so far in 2015.
However, that ruled out the recovery in prices of most crops that investors are pricing in, with the bank seeing the futures curve as overgenerous, on a 12-month horizon, for all but one contract – Chicago soybeans, for which its forecasts were roughly in line.
The bank noted that “weather risks have increased in Brazil over the last few weeks on dry planting conditions”, reflected in a lag in soybean sowings progress.
However, Goldman also underlined the threat, which has increasingly absorbed investors, of a “sharp pick-up in selling by Argentinian farmers” following Sunday’s presidential elections – at which both candidates promising to ease taxes and red tape on agriculture.
“Argentinian farmers have accumulated significant [soybean] inventories for inflation hedging purposes and could be incentivised to sell as both candidates promise to lower soybean export tariffs.”
‘Volatile price action’
On corn, it stuck by forecasts of futures holding at $3.75 a bushel for at least a year, below the $3.90 a bushel that Chicago’s December 2016 contract was pricing in.
“With the recent upward adjustments to US and global – particularly China – corn carryout estimates, we continue to see robust 2015-16 supply keeping stock-to-use ratios elevated,” the bank said.
And on New York cotton, it stood by expectations of prices holding at about 60 cents a pound, below the 64.04 cents a pound at which December 2016 futures were trading at, highlighting the dent to demand prospects from weakened expectations for economic growth in emerging markets.
Even on cocoa – for which Goldman raised its forecasts for New York futures by $200 a tonne to $3,200 a tonne on three-month, six-month and 12-month horizons – the estimates remained comfortably below the futures curve.
“El Niño conditions are likely to keep price action volatile, and potentially skewed to the upside, for a few months more.
“However, in the absence of unfavourable weather, demand recovery is unlikely to be strong enough to keep the market in substantial deficit.”
Bearish on livestock
On Chicago livestock futures, the bank warned of further falls to come, expecting returns of a negative 9.5% over the next 12 months, even after a negative 22% recorded so far in 2015.
For live cattle, it stood by forecasts of futures hitting 120 cents a pound in a year’s time, a touch below the level that investors are pricing in, citing pressure from the unexpectedly rapid US recovery highlighted earlier this week by the US Department of Agriculture.
“Over the longer-run, we continue to see the herd rebuilding cycle keeping downward pressure on [live cattle] prices.”
In lean hogs, the bank said that “dollar strength, herd rebuilding and heavier slaughter weights will continue to put downside pressure on prices over the medium-term”, if acknowledging doubt of how much demand weakness was playing a role in the market.
