Itaú BBA - Partial Reversals

Commodities Monthly Report

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Partial Reversals

April 9, 2014

The Itaú Commodity Index (ICI) has risen 2.3% since mid-March.

•  Signs of moderate stimuli in China led metal commodities to partially reverse the declines registered until early March.

• Hopes of an end to the conflict in Libya suggest a rebound in exports ahead, possibly increasing potential OPEC output previously restricted by sanctions or conflicts.

•  Improved weather conditions have led several agricultural commodities to fall from the recent highs, partly erasing the gains recorded until mid-March. Corn and soybean prices continued to rise.

The Itaú Commodity Index (ICI) has risen 2.3% since mid-March. The breakdown by components shows higher metal (+6.1%), agricultural (+2.1%), and oil-related (+0.7%) prices. The three drivers behind the price movement were: i) an improved outlook for short-term growth in China, due to the stimulative measures recently announced by the government; ii) the agreement between the Libyian government and rebels; and iii) improved weather conditions in many agricultural regions. Better China-related sentiment led to a partial reversal of the declines in metal prices recorded in early March, while favorable weather erased some of the gains in agricultural commodity prices. Finally, the agreement in Libya suggests that the country’s crude exports are likely to resume in the future. Our scenario roughly assumed these outcomes. We are maintaining our year-end forecasts and expect the ICI to drop 3.6% from the recent levels (-1.9% YoY).

WTI oil prices continue to outperform Brent prices. Brent prices have fallen since mid-March, reflecting the deal between rebels and the Libyan government. The deal will probably lead to a recovery in the country’s oil exports over the next few months. Meanwhile, WTI prices have risen  mildly, still affected by the net withdrawals of crude oil stored in the Cushing region. We maintain our year-end price forecasts for Brent (USD 105/bbl) and WTI (USD 101/bbl). Despite Russia’s relevance to the global supply of energy commodities, the crisis in Ukraine did not affect Brent prices, unlike the recent conflicts in the Middle East.

A mixed performance by agricultural commodities. International corn and soybean prices climbed 4.3% and 6.8%, respectively, driven by strong demand and a downward revision in the soybean crop estimates for Brazil. Meanwhile, wheat, sugar, cotton and coffee prices dropped from the recent highs, partially erasing the gains registered until mid-March. The slide may be somewhat attributable to the improved weather conditions in producing regions. The normalization of rainfall in Brazil’s farming regions is helping to ease the concerns surrounding sugarcane and coffee plantations. However, given that the recent weather is unlikely to be enough to offset the losses caused by the drought in January, we forecast that coffee and sugar prices will rise again throughout the year.

Agricultural Commodities: Increased Likelihood of the Arrival of El Niño

Higher corn and soybean prices and the partial reversal of the price gains in other agricultural commodities. Mixed performances have been observed since mid-March, following a period of price increases for major agricultural commodities. Corn and soybean continued to rise (4.3% and 6.8%, respectively), while others such as wheat (-4.8%), sugar (-6.3%), coffee (-4.6%) and cotton (-2.5%) dropped from their recent highs. The improved weather conditions in the country’s main farming regions are, to some extent, responsible for the drop in prices.

Sugar and coffee prices are set to rebound. The normalization of weather conditions in Brazil’s producing regions has helped alleviate the concerns surrounding sugarcane and coffee plantations, driving the prices for both commodities down. However, the recent weather conditions are, in our view, unlikely to be enough to offset the losses caused by the drought in January. We expect the output from Brazil to be lower than the market is currently pricing in, causing deficits in the global supply-demand balances for both commodities. As a result, we continue to forecast respective gains in coffee and sugar prices, to USD 2.20/lb and USD 19.50/lb, by the end of 2014.

The arrival of El Niño around October represents additional upside for sugar prices. According to several weather institutes, the likelihood of the materialization of the El Niño weather pattern during the second half of the year is rising, which would mean less rainfall in Asia and more rainfall in the Center-South region of Brazil. Sugar output would be doubly hurt because the above-average rainfall in Brazil would slow the harvest, while dryer monsoons would reduce the yields in India and Thailand’s 2014/15 crops.

El Niño may also affect other agricultural commodities, depending on the intensity and timing. The pattern is usually unfavorable for agricultural production in Asia and favorable for the Americas, but that will depend on the timing. A peak during the planting or harvest may hurt the output, even in the Americas.

Higher corn and soybean prices reflect the outlook for a not-so-lose supply-demand balance for both commodities.

  • Robust demand is partly responsible for the performance of corn and soybean prices. According to the evolution of corn and soybean net export sales in the U.S., exports are above the current scenario outlined by the U.S. Department of Agriculture (USDA), suggesting upward revisions in the entity’s upcoming monthly reports. Furthermore, the stock data as of March 1 shows that inventories are below the USDA’s implied scenario – another sign that total demand (external + domestic) is above the current official estimates.
  • Expectations for the soybean crop in Brazil continue to decline. Forecasts for the Brazilian crop, which ranged between 85 and 95 million metric tons (mmt) until mid-January, are now between 82 and 88 mmt. The downward revision has already been documented by government-related entities: CONAB revised its estimate to 85.4 mmt (from 90 mmt), while the USDA revised its call to 88.5 mmt (from 90 mmt).

Despite the short-term drivers, our year-end corn and soybean forecasts remain unchanged. Short-term drivers are likely to lose momentum starting in 4Q14, leading prices to  be defined by the next harvest in the northern hemisphere. For now, we expect yields to be within the long-term historical average, with some switch of the planted area from corn to soybeans in the U.S. We therefore maintain our year-end corn and soybean price forecasts at USD 5.0 and USD 12.2 per bushel, respectively.

Artur Manoel Passos



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

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


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