Itaú BBA - Lower Soybean and Iron Ore Prices

Commodities Monthly Report

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Lower Soybean and Iron Ore Prices

September 9, 2014

The Itaú Commodity Index (ICI) has declined 4.7% since the end of July

• Agriculture: We lowered our forecasts for soybeans (surpluses require deeper price drops to balance the market) and sugar (high inventories are delaying the expected rebound in prices.)

• Metals: We cut our estimate for iron ore (to USD 90 from USD 101/ton), acknowledging that the balance between supply and demand occurs at lower prices.

• Conflicts in Iraq and Ukraine are not preventing a decline in crude oil prices. The market sees little risk of global supply being affected.

The Itaú Commodity Index (ICI) has declined 4.7% since the end of July, as price drops for soybeans, iron ore and oil led to declines in all sub-indexes in the period. Other commodities presented mixed performances, with stable base metals, corn, wheat and coffee, and falling sugar prices.

The slide since late July reinforces the trend seen for international commodity prices throughout the year. The sub-indexes for agriculture, metals and energy accumulate year-to-date drops of 13.0%, 16.8% and 7.7%, respectively. Favorable weather conditions are behind the decline in agricultural prices, while drops in metal and energy prices were driven by a long period of high prices (encouraging more production) combined with a slowing global demand.

We revised our forecasts for soybeans, sugar and iron ore downward, but lifted our estimates for coffee. These adjustments acknowledge the following factors:

  • Expectations of a strong surplus in the global soybean crop for 2014/15;
  • Estimated equilibrium price for iron ore close to USD 90/ton, below our previous calculation of USD 101/ton;
  • Large inventories preventing the expected rebound in sugar prices;
  • Outlook for larger losses in Brazil’s coffee crop.

All in all, our forecast for the ICI now contemplates a deeper drop. We now foresee a 7.0% decline in 2014 (previously: -5.6%), followed by a 2.1% advance in 2015 (previously: 3.0%).

Our call considers a 2.5% increase from current levels by year-end, driven by higher prices for sugar, WTI crude and grains.

Agriculture: Mixed Adjustments

After several months of declines, corn and wheat prices have been stable since mid-July. Futures contracts due in December traded around USD 3.6 and USD 5.5/bushel, respectively. We maintain our year-end forecasts at USD 4.0 for corn and USD 5.5 for wheat, but acknowledge downside to our scenario.

Unlike corn and wheat, soybean prices continued to fall. Current prices still provide more attractive margins for soybeans than for corn, and we believe the reaction by U.S. producers to the price drop has been less intense.

We revised downward our year-end soybean forecasts to USD 10.0 from USD 11.0/bushel, as expected surpluses for the 2014/15 soybean crop require lower prices to balance the market.

We reduced our year-end forecast for sugar to 18.8 cents/lb. from 19.5 cents, as high inventories delay the anticipated price rebound in the transition of a surplus to a (small) deficit in 2015.

We lifted our call for international coffee prices to USD 2.00/lb. from USD 1.80, in light of the recent evolution of weather conditions (and expectations) for the Brazilian crop, which point to bigger losses than expected a few months ago.

Crude Oil: No Geopolitical “Premium”?

Crude oil prices are down year-to-date. Brent crude is trading close to USD 100.0/bbl, which is much lower than the 2013 average (USD 108.1). The same goes for WTI, currently at USD 93.0/bbl (2013 average: USD 98.0).

The price slide is consistent with the supply pressure caused by higher output in North America.

Conflicts near producing regions have caused price increases in the past, but this has not been the case in 2014. There is turmoil in Iraq, Ukraine and Libya, all involving significant oil producers (Russia, when it comes to Ukraine), but oil prices present little reaction to changes in the tension level.

The perception in the market is of little risk that oil supply will be affected. The U.S. government’s willingness to use air strikes against rebels in Iraq reduced risks of damage to producing infrastructure in that country. In Ukraine, sanctions are unlikely to impact oil and natural gas in the short term.

However, conflicts that jeopardize global oil output are likely to cause price increases. 


Artur Manoel Passos

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