(Agrimoney) – The end of the commodities rout, which has driven prices to a 13-year low, is nigh, Goldman Sachs forecasts indicated, as its lifted its short-term sugar price forecast, and cautioned of colder European temperatures to come.
The bank forecast commodity prices, as measured by the S&P GSCI Enhanced Commodity index, rising over the next 12 months –by 3.0%.
The rise, while modest, represents a more bullish outlook than expected last month, when Goldman forecast a decline of 1.0% in prices over the following year.
It would also put the market on course for its first calendar year of increase since 2011, since when investors in the index would have seen their money near halve.
Target prices
The improved forecast actually reflected continued losses in commodity prices rather than, in the main, more optimistic target prices for futures.
Indeed, on crops, a slight recovery – with returns from the complex now down 15.2% for the year rather than 16.5% a month ago – had worsened the prospect for investors ahead.
Ags were seen returning a negative 1.0% on a 12-month horizon, compared with a negative 0.3% figure last month.
The slump in the livestock complex has come closer to washing through, with the forecast 12-month returns target now minus 5.0%, compared with 9.5% a month ago.
Sugar upgrade
However, Goldman did nudge higher to 14.0 cents a pound, from 13.0 cents a pound, its forecast for sugar futures on a three-month timescale.
“Unfavourable weather and the risk of more to come, thanks to El Niño conditions, points to the global sugar market entering deficit this [2015-16] year,” Goldman said.
While weakness in the Brazilian real and the prospect of a boost to Indian exports from the reintroduction of export subsidies suggest “a better supplied market… given the increase in near-term supply risks, we revise our three-month forecast higher”.
Goldman forecasts the real, currently at R$4.01 to $1, devaluing to R$4.30 to $1 over the next 12 months, cutting the value in dollar terms of assets such as sugar in which Brazil is a major player.
‘Further downside risks’
Nonetheless, the Goldman sugar price forecast remains well below the futures curve, with New York’s May contract on Tuesday trading at 14.51 cents a pound.
The bank was also downbeat on the outlook for cotton prices, seeing futures holding at about 60 cents a pound over the next year, well below a futures curve which prices the July 2016 contract, for instance, at 64.78 cents a pound.
“Given the intensity of the recent slowdown in emerging markets we see further downside risks to [cotton] demand,” Goldman said, noting also “an exceptionally large global inventory”.
The bank’s forecasts for Chicago corn futures sticking at about $3.75 a bushel were closer to the futures curve, and ideas of wheat futures at $5.30 a bushel on three-, six- and 12-month horizons more optimistic than most investors are expecting.
Cold European temperatures ahead
While Goldman did not expand on its reasons for relative optimism on wheat futures, its analysis came in a report in which it highlighted the prospect of colder weather to come in Europe from January – as signalled by two indicators, the Arctic and North Atlantic oscillations.
Both of these indicators are to swing into negative territory, signalling cooler temperatures, and potentially drier conditions, with the Arctic Oscillation showing that Europe’s current mild winter conditions “are not forecast to last beyond end-2015”, the bank said.
“Atlantic sea-surface temperatures, polar vortex strength and other indicators point towards a negative Arctic Oscillation this winter,” allowing cool polar air to head south.
“Current weather model forecasts suggest that the Arctic Oscillation will remain positive through December before turning negative in January 2016, potentially back-loading cold weather in Europe this winter.”
The comments come at a time when the lack of snow cover, and the limited degree of hibernation of autumn-sown crops, have raised concerns over their lack of hardiness should frosts arrive in the European Union, the world’s top wheat producer.
“Winter crops were prevented from gaining frost tolerance due to the mild temperatures in [central and northern Europe], and are now potentially exposed to frost kill if temperatures abruptly move to seasonal values,” the European Commission’s Mars agricultural meteorology unit said last week.
