Itaú BBA - Lower Forecasts for Agricultural Prices

Commodities Monthly Report

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Lower Forecasts for Agricultural Prices

October 2, 2013

The Itaú Commodity Index (ICI) fell 2.9% in September.

• We revised downwards our year-end 2013 forecasts for corn (from USD 5.5 to 4.6 per bushel) and wheat (from USD 6.8 to 6.6 per bushel).
 

• Metal prices retreated in September, despite signs of accelerating growth in China, and we expect an additional 5% drop in prices before the end of the year.
 

• While we are maintaining our forecasts for metals and energy, a greater delay in the Fed’s monetary stimulus tapering adds upward risk to prices.
 

• Lower agricultural prices reduce inflationary pressure.
 

The Itaú Commodity Index (ICI) fell 2.9% in September, due to lower geopolitical risk, evidence of a slower restocking pace in China and the passing of the critical corn and soybean crop development period in the U.S. According to the breakdown, all sub-indexes posted declines: Agriculture (-2.7%), Base Metals (-0.9%) and Energy (-4.3%). So far, the Fed’s dovish surprise has had only a temporary impact on commodities. While prices initially rose, most receded to their pre-meeting levels the following week.

We revised downwards our agricultural commodity forecasts and maintained the scenario for metals and energy, leading to a 1.6% drop in our ICI estimate. The main adjustment was in corn, which affects the price forecasts for wheat and soybean. We maintained our projections for metals and energy, in line with our baseline view that the Fed has postponed the QE tapering by only a few months, to December.

The alternative scenario, in which the Fed maintains the pace of asset purchases for a longer period, would drive commodity prices up. The impact on commodities of a more expansionary monetary policy can be broken down into three channels, all consistent with higher prices: i) a weaker dollar; ii) higher global growth; and iii) higher inflation expectations in the U.S. In this scenario, we expect the ICI to surpass the base scenario by 5%, until the expansionary policies start to be reversed.

Lower short-term risks for corn and soybean supply. Although the climate risks associated with corn and soybean crops in recent weeks have not materialized, the USDA will likely reduce its corn and soybean harvest estimates in the next monthly report. However, these adjustments have already been incorporated into the current market expectations, and the surplus scenario is maintained for both commodities. In the case of corn, the prospect of a strong surplus is causing prices to converge to a level close to U.S. producers’ total cost. We are therefore downwardly revising our year-end 2013 international corn price forecasts, from USD 5.5 to 4.6 per bushel. This revision is consistent with lower wheat prices by the end of 2013 (USD 6.6 per bushel vs. our previous forecast of USD 6.8) and lower soybean prices by the end of 2014 (USD 12.2 per bushel vs. our previous forecast of USD 13.5).

Industrial metal prices are declining despite the new surprises in China. Metal prices fell 2.7% in September (according to the ICI-Metals sub-index), despite new signs of accelerating growth in China in 3Q13. The current above-expectation numbers in China were not enough to sustain the upward price movement because they failed to generate growth-forecast revisions for the coming quarters. Moreover, the pace of inventory building in China seems to be losing momentum; and, without a re-acceleration in demand growth, the prospect for various metals is a surplus. We are therefore maintaining our year-end forecasts for ICI Metals, at -9.7% YoY in 2013 and -7.0% YoY in 2014. We expect metal prices to fall another 5.6% by the end of the year.

Energy prices fell 4.3% in September, due to lower geopolitical risks and prospects of a looser global balance. The likelihood of a military strike against Syria has diminished, the oil supply in Libya is recovering and production in the U.S. is up again. The global balance should be less tight in the following months, preventing Brent prices from remaining sustainably above USD 110/bbl. We maintain our forecasts for the ICI energy sub-index, at 6.6% YoY in 2013 and -0.8% YoY in 2014.

The forecast revision for corn and other agricultural commodities reduces the inflationary pressure of international commodity prices. With the adjustments, we now forecast a 0.3% decline in ICI-inflation between August and December, versus our previous forecast of a 2.8% increase in the same period.

Grains: Lower Risks, Lower Prices

Lower short-term supply risks for corn and soybean. Given that the climate risks associated with U.S. corn and soybean crops in recent weeks have not materialized, the prices of both commodities retreated from the levels seen in late August. And although the USDA will likely reduce its estimates for both crops in its next monthly report, the adjustments have already been priced in and the surplus scenario maintained for both commodities. Given the planting delay, part of the harvest in the states of Minnesota, Wisconsin and North Dakota may still be affected by frost in the second half of October; with a potentially higher impact on soybean than corn.

Downward revision of our corn price forecasts. The prospect of a strong corn surplus has been causing prices to converge to a level close to the total U.S. producers’ cost. We are therefore downwardly revising our year-end international price forecasts for 2013, from USD 5.5 to 4.6 per bushel, and for 2014, from USD 5.7 to 5.0 per bushel. Our soybean forecasts remain at USD 13.2 per bushel by year-end 2013.

Adjustment of relative prices between soybean and corn should be postponed until the next harvest in the northern hemisphere. With the downward revision of corn forecasts, the scenario has become a relationship between soybean and corn prices that favors soybean production. However, producers in the southern hemisphere will not be able to adjust their crops and balance prices – a process that is only expected to take place during the next harvesting cycle in the northern hemisphere. Given that the larger harvest in the U.S. is likely to drive soybean prices down in the second half of 2014, we forecast prices at USD 12.2 per bushel by the end of next year, implying a 7% drop year-over-year.

Fundamentals are consistent with a high wheat premium relative to corn. According to the USDA’s last wheat balance sheet, supply and demand were close to equilibrium, unlike corn and soybean. The USDA’s quarterly estimates on agricultural stocks reinforced this heterogeneity, showing higher-than-expected corn and soybean and lower-than-expected wheat stocks. Still, the downward revision in corn forecasts implies lower wheat prices in the short term because part of this demand is interchangeable. We are therefore downwardly revising our 2013 year-end forecast to USD 6.6 per bushel, from USD 6.8 previously.

Artur Manoel Passos

Forecasts:

* 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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