Agri Commodity Outlook 2018: Good Buy, Low Prices

Agri Commodity Outlook 2018: Good Buy, Low Prices


We at Rabobank have just published our Agri
Commodity Outlook for 2018. It includes our price forecasts, along with supply and demand
projections for agri commodities. And in this video we will discuss some of the highlights. In 2017, soft commodity prices were particularly
weak. Looking ahead for 2018, we may see some changes. Prices for many commodities are currently
at relatively low levels, but balance sheets are forecast to tighten, slowly reversing
the trend of continued stock building. We view weather as the biggest risk factor…
not only when it comes to prices moving lower in case of, once again, above-trend yields,
but particularly for prices to show a strong upside reaction. The potential development
of La Niña needs to be monitored closely, as there is currently a 70% chance of this
weather phenomenon materialising in 2018. This could bring severe dryness and heat to
US producing areas. Therefore we consider the downside risk for
many agri commodities prices to be limited, while the upside risk remains much, much larger. In addition, we will see funds continue to
be active in agri markets. This can exaggerate commodity price movements at times, providing
both opportunities and risks for food & agri companies. Now let’s check in with Carlos to see how
coffee markets are expected to evolve next year. Arabica coffee prices have been very stable
in the second part of the year, with only a very small increase in September due to
the dry weather in Brazil. Once the weather improved there, speculators took very aggressive
short positions in the arabica contract. A potential reversal poses a large upside risk
and could take prices beyond USc 150/lb. When it comes to the Brazilian 2018/19 arabica
crop, we are still seeing doubts as to whether the dry weather has impacted the production
potential. This especially holds true for regions like Zona da Mata and Espírito Santo,
areas not so well travelled by coffee analysts. With this in mind, we’re estimating the
crop at around 59m bags, which is a record crop but well below potential. But given that
coffee demand is growing very well, record crops both in Brazil and Vietnam would only
result in a 3 million bag surplus in 2018/19, the vast majority of which is expected to
be in arabicas. Now let’s hear from Charles with an update
on wheat. The global wheat market remains heavily supplied,
with an overwhelming 270m tonnes of ending stocks forecast into 2017/18. But excluding
China from this equation, stocks will be largely unchanged year-on-year in 2017/18. In our
view, this highlights a turning point in the rebalancing of stocks going forward. Rabobank forecasts marginal price strength
for CBOT Wheat futures in the 12-month period, albeit below the forward curve, as exportable
world stocks erode for the first time in six years. The route to higher prices will be
gradual in the absence of a significant weather shock, something, in our view, which appears
well overdue. Given an ongoing low price environment, global
plantings for 2018/19 will see limited growth year-on-year. In the US, we expect a marginal
3% improvement in 2018/19 acres. Which is predominantly led by more spring wheat acres,
given the supply tightness for high-protein wheats—namely hard red spring and durum. The Black Sea region beat all production expectations
in 2017/18, and delivered 8% more than in the previous year. This was mostly led by
an overwhelming record crop in Russia. However, as they are limited by logistical constraints,
Russian stocks are forecast to rise, leaving more grains for exports in future years. So, excluding China, 2018/19 is forecast to
bring about a 7m tonne global deficit, due to a combination of a 1% cut in production,
coupled with a 0.5% hike in consumption. This will be the first deficit since 2012/13, and
it is the beginning of a trend towards rebalancing, a factor which drives our mildly bullish view
on CBOT Wheat. Now over to Graydon, who’ll share some highlights
on the soybean market. Despite the global soybean balance sheet showing
a continuation of historically high stocks, we expect there to be some fundamental differences
in 2018. Global biodiesel policy, feed demand growth,
and increasing global trade are all likely to be mildly supportive for prices in 2018/19
as global balance sheets contract. Although we expect to see a slight year-on-year reduction
in global ending stocks, to 95m tonnes, and barring a global supply side shock, global
soybean prices are expected to be capped by historically high inventory, as stocks remain
at their second-highest level on record. If we assume a return to trend yields, US
soybean production is forecast down 1.4% year-on-year, at 4.37bn bushels. This would still be the
second-largest crop on record, and it should allow for record exports. Similarly, South American production and exports
are expected to continue to increase. A combination of a more supportive Brazilian biodiesel policy
and a reduction in Argentinian export taxes are likely to incentivise production in the
two countries over the coming year. All in all, the 2018/19 season could bring
more price volatility to soybean prices than we have seen over the previous year. Well… even if 2018 might end up bringing
only a slight increase in many agri commodity prices, there are several risks that can result
in price volatility. And food&agri businesses need to prepare. If you’d like to know more about our views
for 2018, please download our latest Outlook report, or reach out to your Rabobank relationship
manager.

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