Crops the best commodities bet, livestock the worst

October 12th, 2015

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Category: Grains, Oilseeds

cornfield450x299(Agrimoney) – Crop futures look the best bets in the commodities complex, despite a deep cut to expectations for coffee price, and livestock the worst, with more pain to come for cattle bulls, Goldman Sachs said.

Goldman forecast that commodities overall will fall by some 10% over the next year, raising doubts over recent recoveries of many raw materials, such as metals and energy.

“Despite the magnitude of the recent rally, we do not believe that any data releases or company announcements over the past two weeks suggest a change in commodity fundamentals,” the bank said, saying that “hard data of emerging market demand… paints a more bearish picture.

“In the oil market, high frequency stocks continue to point to an oversupplied market.

“In metals markets, announced production cuts still fall far short of the quantity of metals demand at risk from further slowdown in China.”

End of the rout for crops?

However, the bank forecast that crop prices, over which it has long held a bearish outlook, will drop by only 0.5% over the next 12 months, as measured by the agriculture segment of the S&P GSCI Enhanced Commodity Index.

That would represent a sharp improvement in performance, after a decline of 13.5% so far this year, and drops of 9.3% in 2014 and 18.0% in 2013.

Indeed, the index’s agriculture segment has not risen in a calendar year since a 5.4% increase in 2012.

Cool on coffee

Goldman’s forecast of a bottoming out in crop prices comes despite an expectation of more to come for the coffee market, for which it cut by up to 30 cents a pound its forecasts for New York arabica futures, seeing them at 120 cents a pound in a year’s time.

New York’s December 2016 contract was trading at 143.70 cents a pound on Monday – implying that the bank foresees a drop of some 16% in the contract ahead.

“El Nino, which is forecast to remain in place over the coming northern hemisphere winter, continues to pose a risk for global coffee producers, including Colombia which has seen a lack of rain over recent weeks,” the bank said.

“But the deflationary effects on export prices of currency depreciation among the key coffee producers – Brazil 46% year to date, Vietnam 5% year to date, Colombia 22% year to date, Indonesia 11% year to date – should continue to weigh on export pricing, in dollar terms, over the coming year.”

‘Weather risks have increased’

The bank’s forecasts were also a little below the futures curve in corn, for which it stuck by an expectation of Chicago futures holding at about $3.75 a bushel , compared with a futures curve seeing price rise a little above $4.00 a bushel next summer, and hold there.

The depreciation in the real, and a “more recent shift in corn-to-soybean ratio could see South American safrinha corn acreage increase”.

The extent of sowings of safrinha corn – planted in Brazil early in the calendar year on land vacated typically by the soybean harvest and, dragging into the dry season a higher risk crop – is seen by many observers as particularly dependent on price incentives for sowings.

However, the bank was near to the futures curve on its forecasts for Chicago wheat futures, seeing them hold at about $5.30 a bushel for the next year, noting the “weather risks have increased” with dryness in the US, Australia and the former Soviet Union.

And on sugar, while its kept forecast for futures holding at 13.0 cents a pound, Goldman acknowledged that “the risks [to the price outlook] are becoming more skewed to the upside.

With Brazilian mills converting more cane than had been expected to ethanol rather than sugar, and with El Nino bringing India a weak monsoon, “there are growing signs that the sugar market could enter deficit this year”.

Bearish on cattle

But Goldman was particularly downbeat on prospects for the livestock complex, foreseeing a drop in prices of 20% over the next year, which would make it the worst performer in the commodities complex on the bank’s estimates.

That fall would come on top of a 15.6% decline already in 2015, although livestock investors achieved a positive 27% return last year.

The bank was particularly downbeat over Chicago live cattle futures, for which it cut its price forecasts by up to 25 cents a pound, seeing values in a year’s time at 120 cents a pound.

The October 2016 contract was trading on Monday at 131.075 cents a pound.

The bank flagged, over the short term, “competition [for US beef] from foreign and alternative domestic meat supplies, particularly chicken, and weaker seasonal demand”, with longer term price falls coming “as the herd rebuilding process exerts ongoing downward pressure”.

For lean hogs, the bank forecast prices averaging 65 cents a pound in a year’s time, below the 69.475 cents a pound October futures were trading at, citing the threat to US exports from a stronger dollar.

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