Crop futures a 'buy', says Morgan Stanley

by Agrimoney.com

The slide in agricultural commodities represents a "buying opportunity" rather than the beginning of a long-term decline, Morgan Stanley said, highlighting US data doubts, and the highest profitability for ethanol plans for more than a year,

The liquidation in agriculture commodities, which drove futures down 10% last month, and has shrunk speculators' net length in Chicago corn to its lowest level since August, was "premature", the bank said.

"We see the recent weakness in agriculture process as a buying opportunity rather than the start of a cyclical downtrend," Morgan Stanley analysts said in an investor briefing, adding that it was "not the time to abandon agriculture".

"We view the current weakness as transient."

'Export arbitrage'

The thesis was based in part on the prospect of lower futures prices sparking demand, meaning it was no longer being rationed to the extent that the US Department of Agriculture outlined in June's Wasde crop report, viewed as something of a bible among crop investors.

"On paper, the ethanol industry is seeing the best production margins since December of 2009, currently sitting at $0.22 a gallon," the report said.

Hog production margins had returned above breakeven, at $22.70 a head, potentially reducing prospects of a cut in herd size.

And, with US corn now cheaper by $0.22 a bushel excluding VAT in southern China, "the export arbitrage to China has opened".

"Given an admitted 10m-tonne deficit between production and demand in China this year, we do not rule out the possibility of further Chinese purchases to rebuild government strategic reserves," Morgan Stanley said.

'We are sceptical'

However, the bank also restated its scepticism in shock US corn estimates last week showing that American farmers sowed 1.7m acres more of the grain than had been expected, and that inventories left over from the last harvest were 380m bushels bigger than expected.

An estimate that North Dakota had lost 2.3m acres in overall crop sowings to poor weather appeared to contradict separate official data showing insurance claims for lost plantings against 6.3m acres.

The higher corn inventory number implied a slump in feed demand of 44% year on year, to the lowest in more than three decades, and appeared at odds with firm cash corn prices, which had reached their highest in more than five years in some areas amid an apparent battle to secure supplies.

"We continue to head anecdotal reports of conusmers - particularly destination ethanol plants - struggling to secure feedstock for delivery in August," the briefing said.

Price outlook

Morgan Stanley said it was "sceptical, and question the accuracy, of the USDA's estimates".

The bank added that it was "bullish" on corn and soybean prices, but foresaw wheat futures as "likely underperforming".

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