Itaú BBA - Falling Prices for Agricultural Commodities and Metals

Commodities Monthly Report

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Falling Prices for Agricultural Commodities and Metals

June 10, 2014

The Itaú Commodity Index (ICI) has fallen 3.7% since the end of April

• Favorable weather conditions in May dragged down prices for agricultural commodities.

• Iron ore prices continue to drop, given the outlook for larger supply from Australia and concerns over the real estate sector in China. We expect a slight recovery in prices.


The Itaú Commodity Index (ICI) has fallen 3.7% since the end of April, driven by lower prices for agricultural items, iron ore and natural gas. Favorable weather conditions, particularly in the U.S., have increased supply expectations for corn, wheat, soybeans and cotton. A lower risk perception over the conflict in Ukraine is also behind price declines for grains and natural gas. We maintain our ICI forecast for a decline of 1.4% in 2014 and an uptick of 1.6% in 2015. Our forecast for 2014 assumes an advance of 0.6% from current levels, driven by iron ore and agricultural commodities (excluding soybeans). The two main downside risks to our scenario are: i) the iron ore balance reaching equilibrium with prices below USD 95.0/ton (our call: USD 101.0/ton); and ii) better-than-average weather conditions for supply ahead, leading to further drops in agricultural commodity prices.

Better weather conditions for agriculture in May. International prices for agricultural commodities have declined since the end of April (-10.0%, according to the ICI-Agricultural), partly reversing the gain year to date. The recent slide included all the main commodities: corn (-12.3%), wheat (-14.1%), soybeans (-4.8%), cotton (-10.2%), coffee (-18.6%) and sugar (-1.5%). The first four items were directly affected by the outlook for better supply, particularly from the U.S. In turn, sugar and coffee prices are influenced by uncertainty over fundamentals, as estimates for the balance between supply and demand for both commodities range from small surpluses to wide deficits.

Iron ore prices continue to retreat, driving the ICI-Metals Index down by 3.7% since the end of April. In addition to the reasons cited in our latest report (slowing growth and tighter regulations in China), concerns over the Real Estate sector in China combined with higher supply from Australia pushed prices to below USD 95.0/ton (2013 average: USD 131.8/ton), in a move that we believe is exaggerated. Current prices are below operational costs for producers, who must keep working to meet current demand on a global level. We thus maintain our forecast at USD 101.0/ton by year-end, 6% above current levels. Prices for other non-precious metals marched in the opposite direction, with some gains during the month.

The ICI-Energy Index has risen 0.6% since the end of April. Except for lower natural gas prices, there were no major events involving energy-related commodities. Brent crude prices rose 1.5%, to USD 109.15/bbl, while WTI crude climbed 4.5%, to USD 103.59/bbl in the same period, without any major changes in fundamentals. We maintain our year-end estimates at USD 105.0/bbl for Brent and USD 101.0/bbl for WTI. Our scenario of lower Brent prices assumes some increase in the combined supply from Iran, Iraq and Libya in coming months.

Agricultural Commodities: Favorable Weather in May

May was marked by favorable weather conditions. In the U.S., corn planting recovered, while soybean planting is evolving in line with seasonal patterns. In Brazil, the winter corn crop benefited from adequate rainfall. The weather has also been favorable in other producing regions, prompting price drops for corn (-12.3%), wheat (-14.1%), soybeans (-4.8%) and cotton (-10.2%).

Downside for grain and soybean forecasts. We maintain our year-end price forecasts for corn, wheat and soybeans at USD 5.0, USD 6.8 and USD 12.2 per bushel, respectively. But if favorable weather conditions are sustained, prices should fall further, particularly for corn and wheat.

Sugar and coffee prices are expected to rebound. Weather conditions have been normal in producing regions in Brazil. There is, however, still a lot of uncertainty over the 2014-15 crops. Estimates for these two commodities range widely, from small global surpluses to large deficits. In our view, the recent normalization will not be enough to offset losses caused by the drought in January. Hence, production in Brazil should be smaller than what is priced in by the market and will likely lead to deficits in the global balance for both commodities. We thus continue to expect price increases for coffee and sugar, to USD 2.20/lb. and USD 0.195/lb., respectively.  

El Niño is expected in the second half of the year, but its intensity and impact are as yet unclear. America’s National Oceanic and Atmospheric Administration sees an increasing likelihood of the El Niño weather pattern in the second half, now above 80%. Meanwhile, conditions in the Pacific Ocean are evolving in a way that could create a milder and short-lived phenomenon, with a smaller impact on conditions for agricultural supply.

Artur Manoel Passos

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