Monday, April 14, 2014

Goldman negative on ags, despite El Nino, Ukraine


Goldman Sachs downplayed the support to grain futures from the Ukraine crisis and a potential El Nino in a report downbeat on agricultural commodity prices, foreseeing a drop of 10% over the next year.

The investment bank said that sanctions against Russian grain exports, one of the concerns that has prompted a sharp recovery in world wheat prices since late January, looked off the cards despite the mounting tensions in Ukraine.

"Is extremely unlikely that any sanctions would be placed on Russian exports of food given the humanitarian dimension and that the vast majority of Russian agriculture exports are sent to developing nations," the bank said, while highlighting a threat to shipments of aluminium and copper.

Separately on Monday, Russian wheat was revealed as the lowest offered to Iraq at tender, at $331.69 a tonne on a c&f free out (ciffo) basis, below Canadian supplies offered at $340.50 a tonne and Ukrainian at $342.73 a tonne.

Wheat price forecasts

Goldman's comments came as wheat prices soared 4% at one point in Chicago in Monday, lifted by fresh tensions in Ukraine, where pro-Russian demonstrators have ignored a deadline set by Kiev to quit a government building.

Moscow has hinted at a response if Kiev acts against the demonstrators, saying that "Russia is aware of its responsibility for the lives of fellow citizens in Ukraine and reserves the right to take people under protection," language reminiscent of that used to justify the invasion of Crimea.

However, the bank stood by an expectation of wheat prices falling to $5.75 a bushel on a 12-month horizon, well below the $7.26 ¼ a bushel that Chicago May 2015 futures were factoring in on Monday.

On a three-month horizon, the bank forecast Chicago futures at $6.10 a bushel on a front month basis, below the $6.25 a bushel it forecast a month ago, and the $6.84 ½ a bushel at which July 2014 futures were trading.

'Push wheat prices lower'

The forecasts also assumed that El Nino would not, overall, hurt wheat supply prospects significantly, despite the weather pattern's record of causing undue dryness in Australia and India.

"Concerns over weather conditions will likely limit the decline to wheat prices in the short term," the bank said.

"However, given decent production prospects for the European and Black Sea crops, normalisation in US precipitation or limited El Nino impact would push wheat prices lower as global inventories remain comfortable."

'Reinforce our bearish view'

And Goldman also questioned ideas of an El Nino lifting corn and soybean prices too, given that yields of both are, in the US, "usually favourably impacted by a summer El Nino as conditions are typically cooler and wetter than normal".

Hot weather is a threat to corn in particular, as it lowers the success of the pollination process.

"An El Nino event would… reinforce our bearish view on corn and soybean prices."

The bank stuck by expectations of front-month corn futures averaging $4.00 a bushel in Chicago in 12 months' time, well below the $5.14 ¾ a bushel implied by July 2015 futures.

"Cold and wet conditions in May create upside risk to our price forecast on lower US acreage while the potential for the El Nino weather pattern this summer creates upside risk to our yield and downside risk to our price forecast."

Soybeans will stand at $10.50 a bushel in a year, below the $12.34 a bushel shown by July 2015 futures on Monday, with the bank adding that the wet US spring was only adding to chances of high sowings of the oilseed, which can be planted later than corn, its main rival in spring seeding programmes.

Soft commodities outlook

Goldman did highlight that an El Nino "would skew risk to our soft commodity price forecasts to the upside".

However, while raising its forecasts for coffee prices to 175 cents a pound on three-, six-, and 12-month forecasts, these remain below the futures curve.

On cocoa and sugar it stuck with price forecast below the futures curve too, forecasting agricultural commodities overall falling 10.0% over the next year.

That it most bearish outlook for all commodity sectors except precious metals, which Goldman saw falling by 15.0% over the next year, with livestock prices viewed as in for a 2.0% drop.

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