Itaú BBA - Lower agricultural prices despite El Niño

Commodities Monthly Report

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Lower agricultural prices despite El Niño

June 17, 2015

We reduced our agricultural price forecasts due to lower risk of crop losses and no signs of supply reduction

• Aggregate commodity prices have declined 2.7% since the end of April. We expect a 5.3% increase from current levels by year-end, driven by the outlook of further recovery in oil prices.

• We reduced our agricultural price forecasts to account for the reduced risk of crop losses in the U.S. and Brazil, as well as signs that the adjustment of production to the low prices will not be material, sustaining surpluses and/or large inventories.

• The El Niño weather pattern may continue until year-end, posing a risk of lower rainfall in Asia and higher rainfall in many regions of the Americas. While the impact on prices will depend on the intensity of the pattern in each region, we see both downside risk and upside potential.


The Itaú Commodity Index (ICI) has declined 2.7% since the end of April, partially erasing earlier gains. Its three sub-indexes showed a similar pattern, with a slight decline in aggregate terms and mixed performances across products. In the Agriculture sector, wheat prices increased, while other commodity prices fell. As for metals, iron-ore prices continued to rise, while base-metal prices fell. Finally, a slide in Brent prices offset the increase in WTI crude.

We cut our agricultural price estimates by 2.8 pp for year-end 2015. The adjustments were due to the increased likelihood of persistent excess supply of soybean, corn, sugar and coffee, as well as a decreased risk of crop losses in the U.S. and Brazil (see additional details in the following pages). Our scenario assumes an increase of 5.3% from the current levels by year-end.

What’s the impact of El Niño on commodities?

The world is now officially under the El Niño weather pattern for the first time since 2009. It is expected to be moderate in intensity and last until the end of the year.

Between June and August, El Niño is associated with:

- Mild winters in South America, reducing frost risks in producing regions;

- Above-average rainfall in the southern region of Brazil, Argentina and some U.S. regions;

- Below-average rainfall in Oceania and South/Southeast Asia, which tends to slow pasture development in Australia and New Zealand, affecting the global beef and milk supply. It may also generate losses in coffee crops in Vietnan and in sugarcane crops in Thailand and India.

Between December and February, the pattern is associated with:

- More rainfall in Argentina, Paraguay, Uruguay and the southern region of Brazil, improving the expected yields for summer crops;

- Reduced rainfall in northeastern region of Brazil, including the area known as Matopiba (encompassing parts of the states of Maranhão, Tocantins, Piauí and Bahia), worsening the expected yields for summer crops;

- Still-lower rainfall in Oceania and South/Southeast Asia.

Overall, El Niño tends to be positive for aggregate agricultural and livestock income in Brazil, as the net domestic effect is positive for output, while reducing expected yields in other nations.

The impact on prices is not as clear:

- Below-average rainfall in Oceania and Asia increases the risk of drought-related losses, possibly causing upward price pressure on sugar, wheat, corn and coffee;

- Above-average rainfall in producing regions in the Americas tends to favor yields, reducing the likelihood of drought-related losses and possibly generating downside price pressure on soybean, corn, coffee and sugar. Interestingly, if the rainfall significantly surpasses the average, there is a (low) risk of crop losses;

- Excluding the impact of excessive rainfall in the Americas, El Niño tends to cause upward pressure on products for which Asia and Oceania have a relevant share in global production. In the opposite scenario, it would cause downward pressure. 

- El Niño may intensify the downside for soybean prices, as 90% of the global  output is concentrated in the Americas.

- The upside risks generated by the droughts in Asia may affect international wheat and sugar prices.

Lower agricultural prices despite El Niño

The decline in futures contracts for corn and soybean continued in May, reflecting the high inventories and favorable weather.

Wheat contracts have gained 4.7% since late April, mainly due to the excessive rainfall in the U.S., which reduced the crop yields. With the entry of El Niño, excessive rainfall may also hurt the wheat-crop yields in Brazil.

We lowered our year-end forecasts for corn (to USD 3.8 from USD 4.25/bushel), soybean (to USD 8.4 from USD 9.5/bushel) and wheat (to USD 5.1 from USD 5.4/bushel).

The revision was prompted by evidence of no relevant adjustment to the lower prices for the 2015/16 crop and little change in the near-normal weather conditions despite El Niño. A good example of this is Brazil, where the planted area for corn and soybean continues to expand even after two years of falling prices. Without a supply adjustment, even if demand maintains the average growth pace of recent years, we are facing another year of oversupply for soybeans and still-high inventories for corn and wheat.

International sugar and coffee contracts continued to fall in May and early June, dragged by the favorable weather in Brazil and large inventories.

Sugar production in Brazil is likely to drop, notwithstanding a larger sugarcane harvest. The recent evolution of the sugarcane harvest in the Center-South region of Brazil reinforces the outlook for larger crushing volumes. However, a lower level of total recoverable sugar (TRS) and increased use of the harvest for ethanol production is likely to lead to a slightly lower sugar output for the 2015/16 crop.

A downward adjustment to sugar production in the remainder of the world will only be noticeable by the end of 2015, so the availability of the commodity will remain high.

In this context, we expect international sugar prices to match (producer) prices for ethanol in Brazil, given that the adjustment of the production mix in Brazil is the key equilibrium factor in the market. We reduced our year-end forecast to USD 0.132, from USD 0.144/lb. The main risk to international prices is Brazil’s exchange rate. In our view, international prices will incorporate the moves in the BRL.

We also lowered our coffee price forecast to USD 1.4/lb from USD 1.5/lb. With current prices at around USD 1.4, we see no fundamentals for gains if the weather conditions remain in line with current forecasts.

Metals – Weak demand

Iron-ore prices extended the gains in May and early June, to USD 63/ton. The commodity has climbed 34% since the lows in early April, when it was traded at USD 47/ton.

The move is apparently attributable to the cycle of inventory restocking in China. However, this temporary rise in demand does not change the outlook for oversupply in the iron-ore market. Global demand will continue to grow slowly, while supply from low-cost producers continues to rise. The slowdown in domestic demand in China exceeded the deceleration in GDP (see chart). The fact that futures contracts due in 4Q15 did not track this move supports our view that the current prices are not sustainable.

We expect a resumption of the declining price trend and maintain our year-end forecast at USD 52.5/ton.

Unlike iron ore, base metals prices have been falling since early May, reversing the April gains. Prices for aluminum, copper and nickel dropped 11%, 8% and 7% in the period, respectively.

We fine-tuned our forecasts following the latest price moves. We revised our copper estimate upward to USD 5,800 from USD 5,600/ton, but reduced our forecasts for the other metals. The adjustments offset each other, and our call for the ICI Metals Index remains unchanged, calling for a 12.9% drop in 2015 (down 1.0% from current levels).

Oil – No changes in OPEC’s strategy

Oil prices have remained relatively stable since late April, with Brent crude trading at around USD 65/bbl and WTI near USD 60/bbl.

OPEC maintained its production targets at its bi-annual meeting in early June, reinforcing its strategy to leave the supply adjustment to high-cost producers. The monthly production numbers support the official statements, as the output from OPEC members is higher than in the past two years.

We maintain our base-case scenario of a partial recovery in oil prices, with Brent crude trading at USD 70/bbl by year-end. This scenario assumes a production adjustment by non-OPEC members (particularly the U.S.) and some demand reaction, which would bring balance to the global oil market.


Artur Manoel Passos

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