Itaú BBA - Less Pronounced Decline This Year

Commodities Monthly Report

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Less Pronounced Decline This Year

January 14, 2014

The Itaú Commodity Index (ICI) has fallen by 2.6% since the end of November, with all three of its components sliding.

•  We have raised our price forecasts for non-precious metals in 2014, given the outlook of stronger global growth, but we still expect a drop in prices during the year.

•  Crude oil: a resumption of production in Libya is dragging prices down, but conflicts in Iraq pose an upside risk to prices in the short term.

•  Mixed performance and few changes in fundamentals for agricultural commodities.

The Itaú Commodity Index (ICI) has fallen by 2.6% since the end of November, with all three of its components sliding. Behind the decline in each sub-index are mixed performances for commodities in each group, as the moves in each commodity were due more to idiosyncratic factors than to systemic ones. Despite the recent slide, we are raising our price forecasts for non-precious metals based on the prospect of stronger global growth. Nevertheless, we still forecast falling prices for metals and energy-related commodities throughout 2014.

Agricultural commodities: mixed performance and few changes in fundamentals. Although the ICI-Agricultural sub-index ICI has fallen by 3.7% since the end of November, agricultural commodities have shown mixed performance, with both hikes (soybeans, wheat and sugar) and declines (corn, cotton and coffee) in the period. The price changes were consistent with changes in the outlook for supply and demand for each commodity, except in the cases of sugar and coffee. The highlight was the USDA’s January report, which, unlike in previous years, failed to include significant changes to the supply and demand estimates. In line with the lack of significant changes in fundamentals, we are maintaining our year-end 2014 price forecasts for agricultural commodities.

Less steep drop in non-precious metal prices this year. The ICI metals sub-index has fallen by 2.5% since late November, driven down by lower iron ore prices despite weather-related delays in shipments from Brazil and Australia. Meanwhile, copper, zinc and lead prices rose on a lower supply outlook (in view of the approaching Indonesian ore export ban, among other factors). We are raising our forecasts for non-precious metals, boosting our YE14 forecast for the ICI metals sub-index by 2.4%. In particular, we now forecast YE14 iron ore prices at USD 107/ton (up from 105/ton previously) and copper prices at USD 6,940/ton (up from 6800/ton previously). These revisions are mainly due to a better global growth outlook, but they also incorporate an expectation of lower production throughout the year. Regardless of the upward revisions, we still expect prices to fall throughout 2014.

Energy: a loser global balance for crude oil in the short term; renewed risks from Iraq. The ICI-Energy sub-index has fallen by 2.0% since the end of November, driven by the decline in Brent crude following the resumption of oil production in Libya. Looking ahead, we are maintaining our price forecasts for year-end 2014 (Brent prices at USD 105/bbl), still expecting the supply growth to mitigate the impact on demand of stronger global growth. The conflicts in Iraq have not affected oil infrastructure there, but they pose an upside risk to prices in the short term.

Grains: Less uncertainty surrounding supply; focus on demand from now on

Fundamentals support corn prices staying within a tight range. Futures contracts (first due date) have fluctuated between USD 4.20 and USD 4.40 per bushel since the end of November. This tight range reflects a combination of prices being near total production costs for U.S. farmers (curbing sales and hindering further declines) with the prospect of a strong surplus in the current crop year (limiting the upside from small revisions in the supply-demand balance). Prices broke through the lower limit of the range shortly before the release of the USDA’s January report, but adjustments were favorable to prices and the drop was reversed.

Corn: adjustments in the U.S. do not change the outlook for a hefty surplus. The January revision in the USDA’s estimates showed a smaller surplus in the U.S., with lower-than-expected output and higher-than-expected demand. But there is still a sizable surplus in the balance for the 2013/14 crop year, and prices should only rise after the next crop from the Northern Hemisphere, due to a smaller planted area. We maintain our year-end corn price forecast of USD 5.0 per bushel.

Soybeans: neutral adjustments, unchanged forecasts. Soybean contracts (due in March 2014) fluctuated between USD 13.0 and USD 13.3 per bushel in December, dropping to USD 12.8 per bushel by the last few days of 2013. The decline may be related to a reduction in net long positions held by hedge funds. The January report by the USDA showed neutral adjustments in the U.S. balance, with higher output offset by a matching increase in demand. Hence, the balances remain tight in the U.S. and loose in the rest of the world, given the outlook for an all-time-high Brazilian crop. We continue to expect prices near USD 13.0 per bushel in contracts for delivery before the next crop in the Northern Hemisphere and at USD 12.2 per bushel starting in 4Q14.

Focus on demand indicators for corn and soybeans. With fewer uncertainties regarding the U.S. crop and relatively favorable weather in the Southern Hemisphere, corn and soybean prices have come to be more influenced by demand indicators. The main focus point is the evolution of weekly export sales in the United States. The combination of shipments and outstanding contracts is advancing at a brisk pace, signaling that exports are stronger than expected in the current USDA scenario for both commodities. The question is whether such contracts will be fulfilled or if the harvest in the Southern Hemisphere will lead to cancelations (especially from China).

Wheat: larger supply and a lower premium in the short term. The wheat premium to corn has narrowed since late November, in line with two changes in fundamentals in the 2013/14 crop year: the upward revision in the Canadian crop and higher-than-expected inventory estimates in the U.S. on December 1. The change could have led us to lower our price forecasts for 2014, but the winter freeze in the U.S. posed risks for the winter crop, so we have maintained our year-end forecast of USD 6.8 per bushel.

Soft commodities: Lower coffee and cotton prices by the end of 2014

Coffee: too early to expect a deficit in the 2014/15 crop. After yet another year marked by a surplus in the global balance and falling prices, international coffee prices rebounded in January, driven by uncertainties related to the 2014/15 crop. In addition to concerns related to supply outside of Brazil, a key factor is the likelihood of lower Brazilian production, even in an “on” year in the biennial production cycle. Despite these uncertainties, we continue to expect lower prices by year-end, as there is still no evidence of a global deficit in the 2014/15 crop. Even with lower prices, we believe the adjustment in the global balance will only take place in the 2015/16 crop, when prices should recover.

Cotton: lower supply in the short term will not affect year-end prices. Despite the short-term supply issues that have led to higher cotton prices recently, we maintain our year-end cotton price forecast at 78 cents per pound. This estimate, lower than the prices seen in 2013, is consistent with the scenario described in our previous report (We Expect an Additional Drop in Sugar Prices), in which we projected a crop marked by further inventory accumulation. Furthermore, the eventual end of the inventory policy in China could add extra quantities of cotton to the global market, causing deeper price declines.

Sugar: price recovery starting in the second half. We are maintaining our year-end sugar price forecast of 18.4 cents per pound, despite the sharp drop in prices since November (-9.0%). As mentioned in our previous report (We Expect an Additional Drop in Sugar Prices), we expect low prices throughout the first half of 2014, when surpluses will likely still be observed in the global balance. However, low sugar prices favor ethanol production, which is likely to lead to a transition in the global balance starting in the second half of the year.

Artur Manoel Passos

Verena Paiva


* The Itaú Commodity Index is a proprietary index composed of commodity prices, measured in U.S. dollars and traded in international exchanges, which are relevant to global production. Its sub-indexes are Metals, Energy and Agriculture

** The ICI-Inflation is a proprietary index composed of commodity prices, measured in U.S. dollars and traded in international exchanges, which are relevant to inflation in Brazil (IPCA). Its sub-indexes are Food, Industrial and Energy.

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