Itaú BBA - Falling Prices

Commodities Monthly Report

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Falling Prices

March 5, 2013

Shipping Delays in Brazil and Argentina Affect Short-Term Prices.

Commodity prices fell 3.2% in February, with grain prices reversing the slight increase in January and base metals and energy prices falling in the second half of the month. The agricultural, base-metals and energy sub-indexes fell 2.3%, 5.8% and 3.4%, respectively, relative to the end of January. In average-price terms, the falling prices throughout February were offset by the uptrend in January; our Itaú Commodity Index (ICI) averaged 0.8% versus January. Looking forward, we made downward revisions to some of our YE13 agricultural and base-metal price estimates; we now expect a 0.4% increase (vs. 0.8% previously).  Reservoir levels in Brazil rose to 45.9% capacity, from 37.6% at the end of January.

The fall in base-metal prices (and part of the decline in energy prices) could be attributed to: i) indications that the Chinese government may be willing to implement further measures to cool the property market and ii) a less dovish read on the latest FOMC minutes. The drop in energy prices was also due to the current tightness in the global oil balance, which has relied on the lower, and possibly unsustainable, OPEC supply over the last three months. Weak coordination among OPEC members will probably lead to a decrease in spare capacity ahead.

Iron ore prices did not follow the pattern of other base metals. Instead of falling, prices for delivery in China remained firmly above $150/ton in February. This short-term resilience can be explained by the restocking of Chinese mills. Looking forward, we remain expecting prices to fall to $125/ton by December 2013.

Finally, fundamental agricultural price indicators were mixed. The highlight was the improvement in the weather conditions for the next winter wheat crop in the U.S. Meanwhile, prices were affected by shipping delays in Brazil and Argentina, which generated increased demand for the U.S. crop.

Weather: Mixed Picture for Brazilian Crops

Rains in the country’s key regions for hydroelectric power generation, (reservoirs and rivers with hydroelectric dams) in February have been slightly below the seasonal historical average (85%). In the year (January and February), rains have been 89% of seasonal average. Reservoir levels rose to 45.9% capacity, from 37.6% at the end of January. The nine percentage-point increase is in line with the average for February, but is low when accounting for the significant usage of thermal plants. Despite the above-average rain prospects for the next two months, the evolution of the electricity balance is consolidating a scenario of strong thermal-power usage throughout 2013.

The overall weather conditions in Brazil show a mixed picture for agricultural production in February. On the one hand, the above-average rainfall in the producer states of Rio Grande do Sul, Paraná, and relevant regions of São Paulo and Mato Grosso do Sul may improve crop yields in the regions (corn, soybean) and increase the ATR  (Total Recoverable Sugar) yields. On the other hand, the below-average rainfall in Goiás, Bahia and other northeastern states may reduce yields, even as excess rain delays the soybean harvest in Mato Grosso.

In Argentina, the below-average rainfall and recent heat waves have contributed to renewed expectations of crops coming in below the USDA’s current estimate of 53 million and 27 million tons of soybean and corn, respectively. We expect conditions to improve slightly over the next few days, with better rainfall and the end of the heat waves.

Grains: Shipping Delays in Brazil and Argentina

Grain prices fell in February, reversing the slight increase registered in January. Amid the mixed signs of supply-demand indicators, the fall may be attributable to two factors. First, the latest WASDE report revised the global ending stocks for corn, soybean and wheat upward. Second, snowstorms in the U.S. could be improving wheat conditions for the next crop year. Soybean prices were also affected by shipping delays in Brazil and Argentina.

Our forecasts for year-end 2013 soybean and corn prices remain at 1400 cents/bushel and 638 cents/bushel, respectively. These projections assume crops close to the current ranges in the Southern Hemisphere and a crop under normal weather conditions in the U.S. for the next crop year (October-September). Meanwhile, we are revising our wheat year-end forecasts down to 780 from 820 cents/bushel, reflecting the improved conditions for the next winter crop in the U.S.

Corn prices remained stable, at around 700 cents/bushel, after ending January at 740. The latest WASDE report revised the global ending stocks upward for the current crop year, due to higher production and lower demand. The Brazilian crop estimate was raised, to 72.5 million from 71 million tons, while the estimate for Argentina was lowered, to 27 million from 28 million tons. Both revisions were expected. The unstable conditions in Argentina may lead to further downward revisions in crop expectations.

Meanwhile, CONAB (the Brazilian food supply agency) revised its Brazilian crop estimate to 76 million tons, from 72.2 million. The revision was mainly due to an increase in the expected planted area for the second crop. However, the yield assumed in the forecast is close to that of last year, when the second crop benefited from extremely favorable weather conditions. Under normal weather conditions, the yield could be 10% lower, 4 million tons below forecast.

Soybean prices remained in the 1420-1500 range in February. With the absence of relevant changes in the supply-demand fundamentals, prices were affected by fears of shipment delays in Brazil and Argentina. In Brazil, dock workers protested against the government plan to reform port terminals, leading to a six-hour strike. Concerns of new strikes add to the environment of infrastructure bottlenecks and cast doubt on Brazil’s ability to meet its delivery contracts. In Argentina, producers are delaying deliveries in order to bargain for better exchange-rate conditions with the government. These issues could generate increased demand for the U.S. crop and help sustain prices in the short term.

Energy: Tight (and Unsustainable) Oil Balance 

Brent crude prices maintained an upward trend until mid-February, reaching $118.90/bbl by February 13. Since then, prices have fallen to $111.00, partially offsetting the increase registered in January. The price increase during the first half of February reflected a tighter global balance caused by lower global supply, as a result of the falling output from both OPEC and non-OPEC countries. We expect this tightness to fade in the coming months, as crude production in the U.S. regains its upward trend and OPEC countries reduce their spare capacity. On the demand side, a still-weak global growth forecast for 2013 is consistent with a demand growth close to that of 2012 (around 1.0 mb/d). We therefore maintain our price forecast at $110/bbl by the end of 2013.

The negotiations regarding Iran’s nuclear program resumed last week. The P5+1[1] proposal offered to ease export restrictions on Iran’s petrochemical products, and some additional items, in exchange for the country’s agreement to cease the output of 20 percent enriched uranium. The negotiations will only continue in March or April, but the odds of a deal have increased.

Artur Manoel Passos

[1]The term refers to the five permanent members of the UN Security Council plus Germany.




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