Coffee price rally could find fresh legs, says VM

by Agrimoney.com

Flagging coffee futures could yet revive to a fresh record high, VM Group said, as it cut its estimate for the production surplus, and took another swipe at Starbucks for blaming speculators for elevated prices.

It was "difficult to avoid the conclusion" that coffee markets will in 2011-12 witness more of the supply squeezes, "record tightness and extreme price volatility" which has characterised the current season, the analysis group said.

The comments came as VM, which undertakes commodities research for ABN Amro, cut its estimate for the world surplus in production of arabica beans, the type traded in New York, by 900,000 bags to 5.6m bags for 2010-11.

For 2011-12, an off season in Brazil's cycle of higher and lower production years, the arabica surplus will come in below 700,000 bags.

While prices have retreated from the 34-year highs above 300 cents a pound reached in April, "the bullish outlook remains not only intact but, if we are correct in our estimates for 2011-12, reinforced", VM said.

"The next 'target' might be 318 cents a pound – the price spot arabica that was reached in New York in May 1997."

Starbucks 'pushing demand'

The group's revision to its forecast for the arabica surplus reflected lower hopes for production, dented by the impact of La Nina weather conditions on parts of South America, while consumption has remained steadfast despite higher prices.

Indeed, while Starbucks has consistently blamed speculators for high prices, VM noted that the coffee shop giant "is doing everything it can to push demand.

"Starbucks plans to more than triple its cafes in mainland China, from 450 currently to 1,500 by 2015.

"In any case, the idea that supply is comfortably ahead of demand on a global basis does not ring true."

Data from US regulators shows speculators halving their net long position in New York coffee futures since August, to some 20,500 lots, even as prices have appreciated by nearly 50%.

Robusta forecast

VM also cut its forecast for the world surplus in robusta coffee - the variety traded in London and which is generally viewed as of lower quality than arabica – by 290,000 bags to 4.9m bags, reflecting damage caused by La Nina rains in Indonesia.

The surplus in 2011-12 was pegged at 4.1m bags, although this "could be significantly eroded" if high prices for arabica coffee force roasters to switch beans.

Arabica for July delivery stood 0.3% higher at 266.40 cents a pound in New York at 10:40 GMT.

London robusta beans for July were 0.2% lower at $2,596 a tonne.

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International cotton prices fall

by Zarina Ergasheva

The international cotton prices have sharply fallen. According to some media outlets, the price of one ton of cotton fell from US$5,200 in March to US$3,900 in late April.

Specialists from the Ministry of Energy and Industries (MoEI) consider that the international cotton prices fell as considerable cotton stocks were made following flurry in the cotton market. “International exerts expect this price to keep till the new cotton harvest,” said the source, “Many countries have increased areas under cotton and experts forecast cotton harvest will increase this.”

International media outlets reported in early May that according to International Cotton Advisory Committee (ICAC), after seven consecutive months of increase, cotton prices fell in April 2011 due to significant slowing in demand. The Cotlook A Index reached a record of $2.44 on March 8, 2011, but was down to $1.73 per pound on April 28. These prices remain very high by historical standards.

ICAC pointed out that very high cotton prices, problems of credit access, and the fact that cotton yarn prices did not increase as fast as cotton prices and started yielding ground in mid-March 2011, are all affecting mill use. Global cotton use is expected to reach 25.1 million tons in 2010/11, almost unchanged from 2009/10. A slowing of spinning operations and an increased switch to chemical fibers are curtailing demand for cotton and are reducing its share of world fiber use.

Production is expected to increase by 11% to a record of 27.6 million tons in 2011/12. Increased cotton supplies will feed demand in 2011/12, but high prices and competition from chemical fibers are expected to limit growth in mill use to 3%. World cotton production is projected to exceed mill use in 2011/12, which would result in ending stocks recovering to 10.1 million tons. The world ending stocks-to-use ratio, forecast to reach an all-time low of 33% this season, could rebound to 39% in 2011/12. This would remain lower than the 10-year average of 49% prevailing before 2009/10.

Daily News & Analysis (DNA) reported on May 9 that cotton prices, which were on an upsurge, have fallen 20% in the last one month, easing margin pressures on Indian textile companies and raising prospects of price cuts for end-consumers. Textile firms now expect to sustained margins, if not improved profitability. The decline in prices in India, the world’s second-largest cotton producer after China, is primarily on account of improved production and a supply-glut in the overseas markets. Significantly, this price decline has reduced cotton yarn prices benefiting companies using yarn to make garments.

We will recall that Tajikistan has allocated 210,000 hectares to cotton cultivation this year, but farmers have managed to plant cotton only on 203,100 hectares. Specialists from the Ministry of Agriculture (MoA) say farmers plan to yield some 400,000 tons of raw cotton this year.

In 2010, farmers planted cotton on 160,400 hectares and yielded some 330,000 tons of raw cotton.

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Copper, iron ore and coal to lead commodities

by Commodity Online

Copper, iron ore and coal is expected to create a bullish undertone for commodities thanks to insatiable appetite for commodities from developing nations such as India and China.

The rising demand and the supply demand mismatch turn copper into a top contender for leading the commodities pack up in the coming years. The red metal already faces a market deficit and it is expected to widen further when economies emerge out of their protective cocoons as recovery gathers momentum.

Iron ore also has claimed a position among the favourites following the rising demand for steel and the new pricing structure the market has now adopted. The benefit to the energy sector is obvious enough to be over looked, and coal is a major source of it. Countries like China, which relies on coal for more than 70 percent of its energy needs, are sure to bolster prices of coal in the coming days.

Standard Chartered Plc predicts gold, copper, coal and iron ore to be in the forefront of the commodities price rally in the few years to come.

Goldman Sachs also sees raw materials price to climb in the coming days, along with Deutsche Bank and Barclay’s capital, all of which advocate the strength in commodities to stick.

However, rising commodities prices punt up global food prices adding to the inflationary situation, which lead countries such as China, Brazil and India etc to hike interest rates.

The Standard & Poor’s GSCI 24 commodities index beat stocks, bonds and currencies in the last five months, which is the longest winning streak in last 14 years, reports showed. But the index has been on the downside of the late due to the subsequent fall back of commodities market.

The development expectations from India and China are sure to dominate the future path for commodities. India is expected raise the demand for metals by 80 percent in the coming years to complement her investments in infrastructure. Coal demand, on the other hand, is seen at 2 billion tonnes in the coming years, reports showed.

Nevertheless, more immediate concerns dog the commodities markets currently. Slowing growth in the US, debt troubles in the European Union and rising inflation and the apparent real estate bubble in China, all of which present the market with enough and more hurdles.

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China's Soybean Buying Makes Short-Term Dip

By: Roy Leidahl

China's demand for U.S. soybeans eased recently as South American supplies hit export markets, but the long-term trend in Chinese buying is still strong.

“China has been out of the U.S. market for about two months,” says Mike Hogan, Market360 director at Stewart-Peterson, Inc., West Bend, Wis.

 

U.S. soybean export sales as of April 14 had reached 97% of USDA's projection for 2010-11 and gained to 97.9% as of May 12. “So in one full month we did not add 1%,” says Hogan. “That's a horribly slow pace.”

 

The weekly volume of soybean export inspections had been running from around 30 million bushels to more than 40 million bushels early in 2011. The pace dropped to 5 million to 8 million bushels in recent weeks.

Hogan notes that China bought early this year and cites two factors in reduced Chinese demand:

• South American supplies became available and the Chinese economy slowed from nearly 10% inflation two months ago to about half that last month.
• Reduced inflation usually means business is slowing.

Swine Industry Drives Soy Demand

China likes to buy and process beans to keep the value added in crushing into meal and oil. USDA's Foreign Agricultural Service says that rising incomes in China indicate strong demand for soybean oil. “Demand for soy meal is likely to grow as the hog sector recovers from earlier reductions caused by diseases and low prices,” says FAS.

 

Even though Chinese buying eased recently, growth in China's poultry and pork production, which drive soybean demand, appear to be on track.

 

Assuming that China's economy continues to grow at its current rate and creates jobs, people will continue to move from the country to cities, says Paul Burke, director of global marketing and industry relations at the U.S. Soybean Export Council in St. Louis. “Based on that outlook, one would be able to make an easy assumption that China will continue to need to increase its imports of soybeans for processing to produce soybean meal to supply the animal agriculture industry in China,” says Burke.

 

The world's largest swine herd is in China. About half that herd still is fed table scraps or other products, rather than formulated feeds that use soybean meal. The Soybean Export Council cites statistics from China showing that the commercialized share of the swine industry grew from 23% in 1998 to 56% in 2008, and was still trending higher.

 

During the same years, China's imports of U.S. soybeans soared from about 2 million metric tons to 18 million.

 

“There is a lot of room for continued growth in the Chinese feed and livestock industry,” says Burke.

Short-term Exports Off

Despite those long-term prospects, USDA analysts this month reduced their estimates for U.S. soybean exports in 2010-11 because export shipments had slowed and Chinese demand had eased. July and November futures retreated from their April highs but partially recovered since mid-May.

 

USDA projects U.S. total exports in 2011-12 at 41.9 million metric tons, up less than 1 million from exports to date and outstanding sales for this season. Exports from Brazil and Argentina likely will climb on big crops.

China will account for 60% of global soybean imports in 2011-12, up from 59% this year and 42% in 2006-07, says FAS. China's share of global crush likewise gained from 18 percent in 2006-07 to 25 percent this year and a projected 26 percent in 2011-12.

 

“Global trade is projected at a record spurred by strong demand in China and ample exportable supplies in South America,” says FAS.

 

The soybean shipping season from South American has been lengthening over the years as production increased. “It takes longer to export larger crops,” says one analyst. However, a longer shipping season doesn't necessarily bring a longer period of competition for sales. South American soybeans “can get bought so quickly that by the time the U.S. crop is available, South America is all sold out.”

New-crop Markets

China's economy will be a key factor for new-crop soybean markets, says Hogan, noting that the Chinese have been reluctant buyers for 2011-12. One factor affecting new-crop demand is that the market expects delayed U.S. planting will cause some shift from corn to soybeans.

 

For producers looking at marketing their 2011 crop, Hogan offers this suggestion: “A $12 November bean put would assure you of a relatively good price at this time,” he says, noting the premium on the put is about 24.25 cents. And, he adds, “We've had $12 beans only a handful of times in 25 or 30 years of trading.”

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Economics of Prevented Planting in Corn

by Gary Schnitkey

Farmers will be able to take prevented planting payments once the “final planting date” is reached in late May or early June. In this article, net returns from taking a prevented planting are compared to expected net returns from planting corn and soybeans. Examples suggest prevented planting have returns competitive with planting corn or soybeans. Hence, farmers could have large incentives to take prevented planting payments once the final planting date has been reached. Number of acres on which prevented planting are taken will depend on 1) weather and 2) expected commodity prices at harvest-time.

Net returns from prevented planting

Farmers can take prevented planting payments when 1) the final planting date has been reached, 2) the crop has not been planted for insurable reasons, and 3) the farmer has purchased one of the plans within the COMBO product (RP, RP with exclusion, or YP). Final planting dates are county specific. Common final planting dates are May 25th, May 31st, or June 5th, although some counties will differ from those dates (See Prevented Planting Provision in Crop Insurance for more details on prevented planting). When considering prevented planting, farmers should consult with crop insurance agents to assure that all requirements are met and to make sure that prevented planting can be taken on the desired number of acres as historical plantings may limit prevented planting acres.

Unless prevented planting buy-up coverage has been purchased, prevented planting payments equal 60 percent of the minimum guarantee for crop insurance. As an example, take a farm with an 150 bushel Actual Production History (APH) yield that purchased a Revenue Protection (RP) policy with an 80 percent coverage level. The projected price in 2011 is $6.01 per bushel for corn. The prevented planting payment equals $433 per acre (150 bushel APH yield x $6.01 projected price x 80% coverage level x 60% prevented planting factor). 

Higher coverage levels have higher prevented planting payments. Panel A of Table 1 shows an illustration of prevented planting for the above example with a 150 bushel APH yield. Prevented planting payments are $406 per acre for a 75 percent coverage level, $433 per acre for 80 percent coverage level and $460 per acre for 85 percent coverage level. As the coverage level of the crop insurance product increases, there is more incentive to take the prevented planting payment.

Net returns from prevented planting are compared to expected net returns from planting corn and soybeans. As illustrated in Panel A of Table 1, net returns from prevented planting equal the prevented planting payment minus weed control costs and crop insurance premiums. Weed control costs are estimated at $15 per acre. 

Crop insurance premium costs must be paid for prevent planting and can vary from premium costs for corn when enterprise units have been selected. Enterprise units have planting requirements that must be met, otherwise farmers will be charged based on basic units, which have higher premiums than enterprise units. The example in Table 1 assumes that planting requirements are met and insurance premiums represent enterprise units.

Expected net returns from planting corn or soybeans

Panel B of Table 1 shows estimates of net returns from planting corn and soybeans. In arriving at these estimates, expected yields and expected prices are used. The example uses expected yields of 120 bushels for corn and 45 bushels for soybeans. These expected yields will become lower over time. To aid comparisons, yields to breakeven with taking the corn prevented planting payment are shown at the bottom of Panel A. Breakeven yields for corn are 121 bushels for a 75 percent coverage level policy, 124 bushels for an 80 percent coverage level, and 126 bushels for an 85 percent coverage level policy. 

Expected prices represent harvest-time prices. The $6.40 corn price and $13.30 soybean price are near cash bids for harvest delivery in the third week of May. Higher expected prices lead to more of an economic incentive to plant.

In calculating net returns, costs that have not already been incurred should be subtracted from revenue. In the example, costs are $395 per acre for corn and $263 per acre for soybeans. If a cost has been incurred and cannot be recovered, then it should be excluded. Take as an example nitrogen fertilizer that has been applied. This cost has been incurred and should be excluded from corn costs.

In the above example, corn has net returns of $373 per acre and soybeans have net returns of $363 per acre. These expected returns for planting are below the net returns from prevented planting ($382 per acre for 75 percent coverage level, $401 for 80 percent coverage level, and $466 for 85 percent coverage level). This suggests that taking the prevented planting payment has the highest return for this situation.

Considerations other than net returns

Planting either corn or soybeans has more risks than taking the prevented planting payment because expected yields and expected prices are not known. Theory suggests expected net returns from corn and soybeans should exceed net returns from prevented planting to compensate the farmer for bearing risk.

If corn is planted, there will be an insurance guarantee; however, the guarantee will decrease by 1 percent per day for each day after the final planting date, reaching 60 percent of the original guarantee when 25 days have passed from the final planting date. The decreasing guarantee increases risk the more days after the final planting date. Hence, the lowering guarantee, as well as lowering expected yields, will create more incentives to take prevented planting the later prospective planting takes place.

The above prevented planting example assumes that a crop is not planted on prevented planting acres. Farmers can plant a crop after 25 days have passed from the final planting date. More details on these provisions are provided the May 19th FarmdocDaily entry entitled Prevented Planting Provision in Crop Insurance, http://www.farmdocdaily.illinois.edu/2011/05/prevented_and_late_planting_pr.html). 

What is different this year from previous years?

The 2008 Farm Bill introduced higher subsides for enterprise units. These higher subsidies encouraged farmers to purchase enterprise units and increase coverage level. In 2008, 46 percent of acres using revenue crop insurance products for corn were insured with 75 percent of higher coverage levels. Use increased from 46 percent in 2008 to 65 percent in 2010. It is likely more acres were insured with higher coverage levels in 2011.

Higher coverage levels can lead to more incentives to take prevented planting payments, as prevented planting payments are larger with higher coverage levels. As a result, more acres could go into prevented planting in 2011 as compared to previous years.

Factors impacting number of prevented planting acres

From this point on, prevented planting acres will be impacted by two factors:

1. Weather. Dry weather in the eastern Corn Belt of upper Midwest would allow farmers to plant corn.

2. Expectations of harvest-time commodity prices. Higher commodity prices will increase expected returns from planting, leading to more incentives to plant. Hence, increases in Chicago Mercantile Exchange (CME) futures likely would lead to increases in planted acres and vice versa.

Summary

For farmers who have purchased the COMBO product with high coverage levels, taking a prevented planting payment will be a viable alternative compared to planting corn and soybeans. Weather and expected prices will impact the number of prevented planting acres.

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Wheat prices soar as IGC forecasts harvest deficit

by Agrimoney.com

The world will not, after all, balance its books in wheat next season, despite weaker prospects for consumption by biofuels plants highlighted by the mothballing of Europe's biggest bioethanol plant.

The International Grains Council cut its forecast for world wheat consumption in 2011-12 by 3m tonnes, to 669m tonnes, reflecting in part lower expectations for use by biofuels users such as the UK's Ensus site, which is being mothballed because of high grain prices.

Wheat prices as of 18:00 GMT Minneapolis: $10.61 a bushel, +4.0% Paris: E252.75 a tonne, (closed) London: £198.50 a tonne, +2.7% (closed) Kansas: $9.52 a bushel, +2.6% Chicago: $8.21 a bushel, +3.1% Prices for July contracts on US exchanges, and November lots on European ones

"Use [of wheat] for ethanol is growing less quickly than expected, including in the European Union, while greater use of alternative feeds, including barley, is expected to cut the feeding of wheat in Russia," the influential group said.

However, it lowered its estimate for production even more, by 5m tonnes, to 667m tonnes, reflecting "overly dry conditions in the southern US, much of Europe, and parts of the former Soviet Union".

"The outlook for wheat crops has been affected by unfavourable weather in a number of countries."

'Panic buying'

The warning places the intergovernmental group among the growing band of forecasters to ditch expectations of a rise, or even stasis, in global wheat stocks in 2011-12, although inventories are set to remain at an ample level.

IGC 2011-12 wheat estimates, change on last, (yr-on-yr change) Production: 667m tonnes, -5m tonnes, (+2.8%) Consumption: 669m tonnes, -3m tonnes, (+1.2%) Trade: 127m tonnes, +1m tonnes, (+4.1%) Carryover stocks: 185m tonnes, -1m tonnes, (-0.5%)

The grain's stocks-to-use ratio, a metric of the availability of a crop, and therefore of its price potential, will come in at 27.7% on IGC estimates, well above the 21.3% level in 2007-08 which helped fuel the last spike in prices.

And it came as, thanks to weather scares, wheat futures posted a second day of strong gains, notably in Minneapolis, which trades spring wheat, which US and Canadian farmers are struggling to plant amidst overly damp conditions.

Minneapolis wheat for July soared to $10.78 a bushel at one point, the highest for a spot contract since July 2008.

"Some panic buying is finally surfacing because of the continued delays in the Northern Plains," Darrell Holaday at US broker Country Futures said.

In Europe, grain institute Arvalis raised its estimate of drought damage to France's soft wheat crop, the region's biggest, to "more than 10%" from "far more than 5%".

Total grains

The IGC edged is forecast for consumption of corn by US bioethanol plants in 2011-12 lower too meaning that, while the estimate for production of overall grains was cut by 5m tonnes, inventories were seen higher than before, at 338m tonnes.

Stocks are expected to end this season at 348m tonnes.

Total grain stocks held by major exporters – a metric which exclude those held by countries such as China which are rarely traded, and so have less of an impact on prices – were pegged at 111m tonnes, an eight-year low but 3m tonnes above the previous forecast.

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