Itaú BBA - No relief

Commodities Monthly Report

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No relief

October 1, 2015

We see no relief ahead for commodity producers.

For the full report, see enclosed file

• We have lowered our price forecasts for cotton and wheat, and raised our forecast for sugar, due to the supply outlook. The net effect is a slight drop in our aggregate price forecast for agricultural commodities.

• We see no relief ahead for commodity producers. Our metals and energy price forecasts remain below the levels that futures contracts are pricing in.

The Itaú Commodity Index continued to decline during September (-1.4%). The breakdown by component shows that the drop was caused by excess supply in the oil market: the ICI-Energy fell by 6.9% during the month, while the ICI-Agriculture rose by 4.1% and the ICI-Metals slid by 0.6% over the same period. Year-to-date changes continue to show double-digit declines in all three components: -10.1% for Agriculture, -22.0% for Metals and -14.5% for Energy.

We have slightly reduced our price forecasts for the ICI-Agriculture, cutting our estimates for wheat and cotton prices while raising our estimate for sugar. Better supply conditions for wheat and cotton are consistent with lower prices. We have reduced our YE16 forecasts to USD 5.15/bushel from USD 5.30/bushel for wheat, and to USD 0.62/lb. from USD 0.66/lb. for cotton. At the same time, lower supply in Asia and constraints on Brazil’s capacity to adjust the mix between sugar and ethanol have led us to raise our YE16 sugar price forecast to USD 0.114/lb. from USD 0.11/lb.

We have not changed our price forecasts for metals and energy, so that the net effect of the revision of our agricultural commodity price estimates on the overall ICI is a drop of only 0.4 pp by YE16. Our price scenario for metals contemplates a slight drop from current spot prices, while our scenario for energy assumes small recoveries in the Brent crude price (to USD 55/bbl) and the WTI price (to USD 50/bbl) by YE16.

Our new forecasts remain below the levels that futures curves are pricing in for most commodities. Hence, we continue to expect a challenging environment for countries that are net commodity exporters.

Oil: Can Brent crude fall below USD 30/bbl?

Oil prices have remained at low levels, with Brent crude trading around USD 47/bbl and WTI trading near USD 44/bbl.

The market still has excess supply, despite signs of a small decline in oil output in the United States. 

In our scenario, there will be excess supply until 2H16, sustaining the downward pressure on prices. Our YE16 forecasts for Brent and WTI remain at USD 55/bbl and USD 50/bbl, respectively. Our scenario assumes that equilibrium will be achieved through lower investments in production, particularly in non-conventional oil in North America, and a continuing increase in global demand. Our forecasts assume that OPEC production will remain at current levels.

Given the prospect of excess inventories until mid-2016, can crude prices fall further? Although this is not our base-case scenario, bottlenecks in storage capacity may prompt additional declines in spot prices.

The current inclination in the futures curve (approximately 15% in annualized terms) is defined by storage costs, so there is no difference for producers between selling in the short term and storing (at a cost) and selling in the future. Thus, inventory accumulation removes some of the supply in the short term, reducing the impact of excess supply on spot prices.

If inventories reach full capacity, all production will be offered in the present, possibly causing a sharp drop in prices before supply reacts.

U.S. inventories have already reached 453 million bbl (estimated limit: 610 million bbl). An increase similar to the one observed in 1H15 would drive inventories up to 580 million bbl, near the storage limit, intensifying the risks implied in this alternative scenario.

Grains: Greater availability of wheat around the world

International prices (first due date) for corn and wheat recovered slight recovery in September, climbing by 6.6% and 6.3%, respectively. Soybean prices fell by 0.6%, remaining close to their lows for the year.

In the short term, weather conditions are mixed. In the Northern Hemisphere, dry weather is favoring the corn and soybean harvests. In the Southern Hemisphere, excessive rainfall in Southern Brazil and a drought in Australia are affecting wheat yields.

Weather conditions may be unfavorable to the second corn crop in Brazil. The outlook for dry weather in Brazil’s Center-West until late October is delaying soybean planting. This delay more deeply affects the outlook for the following crop (corn) than the outlook for the soybean crop, which benefits from more favorable timing. Additionally, the end of El Niño around April may be followed by the opposite weather pattern, La Niña, leading to low rainfall and a greater risk of frost.

Global balances for corn and soybeans have the same outlook as last month, with some excess supply for soybeans and a small deficit for corn. Current levels seem to adequately reflect the balance of risks for both commodities. We are maintaining our YE16 price estimates at USD 4.0/bushel for corn and USD 9.1/bushel for soybeans.

We have reduced our YE16 forecast for wheat to USD 5.15/bushel from USD 5.30/bushel. In its last report, the U.S. Department of Agriculture (USDA) raised its estimate of wheat availability in the balance, with more initial inventories and production in the 2015-16 crop year. This adjustment is consistent with lower premiums for wheat relative to corn.

Sugar: A break in the correlation with the Brazilian real

Prices on international sugar contracts climbed by 14% in September, despite a depreciation in the Brazilian real in the period. The contract with the first due date in New York is trading at USD 0.12/lb., topping the USD 0.104/lb. low reached in mid-August.

The break in the correlation between sugar and (Brazilian) hydrous ethanol prices is caused by a combination of two factors. First, more than half of the Brazilian crop has already been crushed, so there is less room for allocating ethanol production to sugar. Second, signs of lower production in China and India suggest a transition in the global balance to some deficit. Even with inventories at high levels, the transition in consistent with higher prices.

We have raised our forecast for international sugar prices to USD 0.114/lb. from USD 0.11/lb. because, at this point in the crushing process, any reaction by Brazilian producers will not be enough to offset lower production in the rest of the world.

Coffee: Neutral balance amid upward and downward pressure

International coffee contracts (first due date for arabica in New York) remained between USD 1.10/lb. and USD 1.25/lb in September, with little reaction to currency depreciation in the main producing countries.

Our YE16 forecast stands at USD 1.28, close to what is priced in the futures curve. This level seems to provide a good balance between downward pressures (favorable weather in Brazil and rising prices in local currencies for the main producers) and upward pressures (risks of crop losses in Central America).


Artur Manoel Passos


For the full report, see enclosed file



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