Itaú BBA - Sustaining the recovery

Commodities Monthly Report

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Sustaining the recovery

September 8, 2016

Commodities rose further since the end of July

For the full report, see enclosed file

• We have revised downward our price forecasts for corn, soybeans and wheat after incorporating higher yields for the summer crop in the United States. On the other hand, we have revised upward our price estimates for sugar (after a reassessment of equilibrium prices) and coffee (on lower supply).

• Oil prices climbed in response to news of an agreement between the largest producers. In our view, even without an agreement, the fundamentals are consistent with prices around USD 50/bbl by year-end. 

• We have revised downward our price forecasts for copper (to current levels), given that prices fell even as favorable news came out. We continue to expect a drop in iron ore prices to USD 45 by year-end.

The Itaú Commodity Index (ICI) has risen by 2.4% since late July, with a mixed performance by its components. The ICI-Energy soared by 10.2% due to a partial rebound in oil prices, which have recovered from their recent lows as the market searches for equilibrium between USD 42/bbl and USD 50/bbl. The ICI-Agriculture has dropped as the current crop reinforces the likelihood of above-average yields for corn and soybeans. Finally, the ICI-Metals slid by 2.8% as drops in aluminum, copper and iron ore prices more than offset higher prices for lead, zinc and tin.

Fine-tuning our metal prices forecasts. The 6.3% drop in copper prices in August – notwithstanding rising oil prices, still-resilient Chinese imports and lower-than-expected output in Chile – is a convincing sign of structural oversupply in the market. Hence, we have lowered our YE16 price forecast. Meanwhile, other base metals are trading substantially above our forecasts, prompting us to marginally increase our price expectations for lead, tin, zinc and nickel. The net effect on the ICI-Metals is negligible.

We expect oil prices to recover by year-end 2016. Looking beyond the present ups and downs being triggered by rumors of a deal among major producers, we believe that the market will need additional oil production from the U.S. shale industry to balance the market in 4Q16. We are confident that equilibrium prices are close to USD 50/bbl and that the risk of oil prices dipping below USD 40/bbl is low.

Lower grain and soybean forecasts; higher sugar prices ahead. We have lowered our price forecasts for corn, soybeans and wheat, recognizing that recent surveys are pointing to abnormally high crop yields in the United States. Conversely, we have revised our sugar scenario upward to match the prices in the futures curve, as we see no clear factors that could drive prices lower in the short term. Despite this revision, the risks in the sugar scenario remain skewed to the upside.

Our scenario implies that the ICI will be stable by the end of 2016 from its current levels, and then rise by 4% in 2017.

Grains: Greater odds of a “super crop” in the U.S. 

Corn, soybean and wheat prices have been on an extended decline since late July (-4%, -5% and -8%, respectively).

The price drop was driven by lower risks to the current crop in the United States. A new round of declines was caused by farm assessments that corroborate the U.S. Department of Agriculture’s forecast of above-average yields for the corn and soybean crops. The U.S. harvest may still be hindered by excessive rainfall and above-average soil humidity, but the balance of indicators points to lower odds of crop losses.

We expect international prices for these three commodities to remain around current levels until year-end. Here are our YE17 estimates (USD/bushel):

  • Corn: 3.6

  • Soybeans: 10

  • Wheat: 4.8

Our scenario assumes a transition to a La Niña weather pattern toward the end of the year, affecting the next crop in the Southern Hemisphere.

Sugar: Funds remain long, with good reason

Since mid-June, international contracts for raw sugar (#11, NY) have been trading near USD 0.2/lb, consolidating a 30% hike year-to-date. 

According to our calculations, the global sugar deficit will narrow to 4 million tons in the 2016-17 crop year from 10 million tons in 2015-16. This scenario assumes 1% growth in global demand (below trend, due to higher prices) and production stability in India and Thailand.

We have raised our forecasts for average sugar prices in 2017 to USD 0.2/lb from USD 0.185/lb, after adjusting the estimates for our revised expectations for the global balance.

Additional upside risk for prices. The biggest risk in the global balance between sugar supply and demand is that production in India and Thailand decreases further in the next crop. In that case, the global deficit in the 2016-17 crop year may become even wider and lead to another round of price hikes.

This upward bias is the reason for the sustained long positions being held by investment funds. Funds have been net long by 250,000 futures contracts for more than two months. The fact that these positions have not been reduced signals that the risks remain tilted to the upside.

Coffee: Prices climb in response to lower supply and FX moves

Coffee futures contracts (Arabica) traded in New York climbed to USD 1.50/lb from USD 1.30/lb in early June. The contract for the first due date is up 18.5% year-to-date.

The recent gains were caused by short-term weather conditions (excessive rainfall right before the harvest in the Southern part of Minas Gerais State in Brazil, sparse frosts in producing regions), the impact of a drought on the next Robusta crop and the appreciation of the currencies of major producers against the U.S. dollar.

We have increased our YE16 price forecast by 7%, to USD 1.43/lb, assuming lower supply in the current crop and the next.


Artur Manoel Passos, CFA


For the full report, see enclosed file

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