Itaú BBA - Seeking the Bottom for Agricultural Prices

Commodities Monthly Report

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Seeking the Bottom for Agricultural Prices

August 11, 2014

The Itaú Commodities Index (ICI) has fallen by 5.8% since the end of June

We have lowered our forecast for agricultural commodities, due to the consolidation of a stronger supply scenario.

• Improved sentiment toward China has led to an increase in the prices of non-precious metals in July. We expect prices to rise a bit more before the end of the year.

• Oil prices retreated in July. Perceived geopolitical risk decreased during the month, despite continued conflicts in and around oil‑producing regions, as the production and transport infrastructure has been little affected. 

The Itaú Commodities Index (ICI) has fallen by 5.8% since the end of June, with declines in agricultural and oil commodities. The prices of agricultural commodities are still seeking a new equilibrium following an improvement in the supply outlook in June and the favorable climatic trends since then. Oil prices retreated over the same period, reflecting a perceived decline in geopolitical risk (despite continued conflicts, oil production has been little affected). Prices for base metal commodities moved in the other direction, rising for the second consecutive month, driven by higher 2014 growth forecasts for China and a tight supply of aluminum.

Revisions to our scenarios for agricultural prices (downward) and base metals (upward) have led to a net decrease in our ICI forecast. We now forecast a decline of 5.6% yoy in 2014 (compared with our previous forecast of a 4.0% drop) and a 3.0% increase in 2015 (previously: 2.4%). This scenario assumes an increase of 2.5% until the end of the year from current levels.

Additional downward revisions of agricultural price estimates. The ICI-agricultural sub-index has dropped by 11.5% since the end of June, with sharp price declines for soybeans, corn and cotton. These declines still reflect the prospect of a global surplus, which has become the consensus view since June. In addition, weather conditions remained favorable for the summer harvest in the Northern Hemisphere in July. These recent developments have led us to lower our price estimates for corn, soybeans, wheat and cotton, and our forecast for the ICI-agricultural sub-index is now 6.7% below our previous forecast for December.

Upward adjustment in our price forecast for base metals. The ICI-metals sub-index has risen by 1.5% since the end of July, still influenced by upward revisions in 2014 growth forecasts for China. Although the revisions in growth forecasts are connected to the first half of the year, this performance undermines the assessment that the strong pace of Chinese imports involved much advance purchasing. The higher expected growth is consistent with slightly higher prices, so we have made an upward adjustment to our forecasts for some metal commodities, taking our ICI-metals sub-index forecast to a level 1.0% above our previous forecast for year-end 2014. Our new year-end forecast implies a slight increase of 2.2% over current levels.

With the revision, we are now forecasting a copper price of USD 6,900.00/ton at year-end 2014, compared with USD 6,700.00/ton in our previous scenario. Our year-end forecast for the price of iron ore remains USD 101.0/ton.

Despite the hike observed in the last two months, base metals are the group of commodities that posted the largest drop in prices this year to date. While the ICI-metals sub-index has registered a cumulative decline of 13.2% ​​this year to date, the ICI‑agricultural sub-index has fallen by 9.9% and the ICI‑energy sub-index has fallen by 3.4% over the same period.

Despite the continued conflicts that are generating risks for the production of oil and gas, perceived geopolitical risk has fallen in recent weeks, resulting in a 5.8% drop in the ICI-energy sub-index since the end of June. This pattern can be explained by two factors. First, the new sanctions imposed on Russia do not affect the production and transport of natural gas and oil in the short term. Second, the conflicts in Iraq and Libya are still taking place far from those countries’ oil production infrastructure.

We have maintained our scenario for a Brent price of USD 105.0 and a WTI price of USD 101.0/barrel in December 2014, which would represent a decline of 0.6% and an increase of 4.3%, respectively, compared with current levels. These forecasts assume some increase in OPEC’s combined production. This expected production hike, coupled with the likely increase in North American production, would exceed the increase in global demand forecasted for the year, meaning that OPEC will likely fail to keep prices close to the USD 110.0/barrel average observed over the last two years.

Agricultural commodities: prices continue to decline

Corn, soybean and cotton prices continued to decline throughout July, falling by more than 10% in the period. The decline can be explained by the consolidation of the global surplus scenario, with high yields in the U.S. and Europe and no significant crop losses in Asia.

The consolidation of the supply scenario and recent price developments has led us to revise our price forecasts for the three commodities once again. We have revised our year-end forecasts for corn (to USD 4.00/bushel from USD 4.50/bushel), soybeans (to USD 11.00/bushel from USD 11.50/bushel) and cotton (to USD 0.68/pound from USD 0.76/pound).

Wheat prices also fell in July, but to a lesser degree. Contracts maturing in December 2014 fell by 8.0% in the month. The smaller decline in wheat prices in July can be explained by their greater decrease in the previous month and by the lower share of the U.S. (where most supply surprises came from) in the global grain supply.

The scenario of lower corn prices is consistent with lower wheat prices; as a consequence, we have also revised our year-end forecast for wheat prices to USD 5.50/bushel from USD 6.00/bushel.


 

Artur Manoel Passos



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