Goldman Sachs cuts rating on commodities - again

by Agrimoney.com

Goldman Sachs has cut further its rating on commodities, warning of a "growing conviction" of price declines as over-valued oil falls back to earth, and high prices prompt buyers to run with thinner inventories.

The bank, whose recommendation earlier in the week for profit-taking in commodities was blamed for a sector sell-off, took a step further into bearish territory, urging investors to go "underweight" on raw materials.

The advice reflected "mounting downside risks" to oil prices which should, for New York crude return below $100 a barrel by mid-summer, depressed by a better outlook for Middle East and North African unrest and "nascent signs of demand destruction" in the US.

Commodity price prospects had been further weakened by "tighter inventory management", evident in Chinese consumers running down stocks rather than buy fresh raw material supplies, and "the negative shock to supply chains resulting from the earthquake in Japan".

Agricultural exception

However, while cutting its forecast return from commodities for the next 12 months, Goldman said that many of these factors would prove temporary, and maintained an "overweight" rating for commodities on a 12-month timescale.

And the bank excluded agricultural commodities even from its short-term recommendation for a modest short, saying it was the "only sector where we see near-term upside", reflecting weak inventory levels.

Indeed, Goldman joined the ranks of analysts doubting the US Department of Agriculture's decision a week ago to stick by inventory forecasts for the end of 2010-11, despite evidence of weaker-than-expected stocks as of March 1.

"While the USDA continues to report stabilisation in old-crop inventories at low levels, strong near-term demand, especially for corn from exports, feed and ethanol, points to further declines in inventories," the bank said.

"Tightness" in inventories of 2010-11 crops was "still looming".

'Sustained elevated prices'

And prospects for a rebuild of stocks in 2011-12 were limited, given a forecast for "continued strong feed and fuel demand".

Indeed, crop markets looked set for "sustained elevated prices", the bank said, seeing the "risk to prices as skewed to the upside".

This was true "especially for corn and cotton, as any supply disappointment will require sharply higher prices to achieve sustainable demand destruction in the face of already tight inventories".

However, the bank also acknowledged risks to a forecast for "rangebound" wheat futures, over which it has been more cautious on price prospects.

"We see upside risks to wheat prices and our forecast over the medium term on 2011-12 production risks and potentially higher feed demand," the bank said.

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