The new grains season (2016/17) has kicked off with prices again languishing at low levels. Since peaking last summer, wheat and corn prices have plunged 25% to hit 10-year lows. Soybeans are still trading above last year’s level, but here too improved production conditions have pushed prices over 20% off their peak at the end of June. Evidently, the perceived break in the sustained downward price trend is back on hold (for now anyway).
Wheat stocks keep on rising
Compared to a year ago, wheat prices have fallen by 20%. The cause of this price decline is fundamental and easy to pinpoint: global output has exceeded demand for the seventh time in ten seasons. And 2016/17 will be the fourth successive season that this has happened. Favourable weather conditions in large parts of the world will again result in swelling stocks. The stocks-to-use ratio will thus rise to 34%, which is very high. But not everything in the world of wheat is in crescendo mode. Crops may be abundant, but there are problems with the quality. Heavy rainfall within the EU in June combined with lower temperatures and fewer sun hours has dampened yields by 10%. This, however, is overshadowed by strong production elsewhere, notably in the US (+15%) and Russia (+18%). Partly for this reason, we expect wheat prices to remain subdued in the coming year. Our projection for end of 2017 is a price of USDc/bushel 485.
Corn output soars to new record highs
On balance, the price for corn has barely budged compared to a year ago. Even so, the price has moved within quite a large bandwidth. Earlier this year corn, unlike wheat, was expected to see a decline in production, leading to decreasing stocks. But then improved weather conditions gave crops a boost, setting the scene for yet another record-breaking year. Global production is set to expand by over 7% in 2016/17. Here too, US production growth (+11%) was a major contributor to the increase. In addition, output in Brazil also accelerated sharply (+22%). With the current stocks-to-use ratio standing at 22%, stocks provide less buffer room than with wheat, so a further price decline is not anticipated here. However, any price increase will also be limited, precisely because of the decline in wheat prices. Our price forecast for end-of 2017 is USDc/bushel 390.
US record production depresses soybean prices
Of all grains and oil seeds, soybeans have been the best performer over the past year. Compared to a year ago, the price is now over 6% higher. This increase was mainly attributable to the poor 2015/16 production season. The decline in supply by over 2% alongside sustained growth in demand (+ 5%) has eroded global soybean stocks. This has halted the previously initiated price decline (-106% from the peak in 2012). However, with 2016/17 now poised to be a new record production year, soybean prices will not rise much further from their current level. The main reason for this development is the production increase in the US (+8%). Against this, consumption is also continuing to grow steadily. Worldwide soybean consumption is projected to grow by over 4% in 2016/17. China, the world’s largest importer, is fuelling this accelerating demand with consumption growth of 5.7%. All in all, therefore, we expect a moderate price rise to around USDc/bushel 1,065 at year-end 2017.
Whereas renewed record production levels are dominating the mood in the grains market, a very different picture prevails in the softs sector. The price for sugar is currently hovering around its highest level in five years. The coffee price is staging its strongest advance in two years’ time, whereas cocoa is consolidating its position at the previously reached relatively high levels. Conditions, in short, are comparatively favourable for these commodities.
Cocoa market awaits new season
Cocoa lost ground in the past few weeks as speculators started to reduce their well-established long positions. The 2015/2016 season has drawn to a close with a significant deficit on the cards, the ICCO forecasting a 212,000mt shortfall. The damaging effects of El Niño in West Africa (which accounts for two thirds of global cocoa production) limited rainfall and a particularly strong Harmattan all impacting on production. The market now awaits the start of the 2016/17 main crop season, the signs are that harvesting will start late in Ivory Coast, with quality and quantity concerns in the delayed early stages. Global demand appears stable currently, adequate stocks in Europe should help the European processors whilst domestic grinding in origin will likely remain feeling the pinch until the end of the year. The short term outlook is that deficits don’t get reversed too quickly and can only be achievable if the main crop comes in healthy before being backed up by a better mid-crop season than the one just passed. Another prolonged and strong Harmattan would not be ideal for any recovering outlook. We expect prices to rise to USD/ton 3,000 by the end of 2016. Looking to 2017, the market anticipates higher production, allowing prices to sink towards USD/ton 2,800.
Coffee price up on Robusta production problems
After bottoming out of a down trend lasting almost 18 months, the coffee markets found a challenge in fortunes. Disappointing Robusta production has lifted prices by 31% since the start of this year. The Arabica price similarly rallied and is now over 19% higher (ytd). The biggest producer of Robusta coffee beans, Vietnam, is contending with production problems due to bad weather. Brazil, the world’s biggest overall bean producer, also expects the production of Conillon (Robusta variety) to be a quarter lower. In response, industry will potentially switch overto a lower grade Arabica beans in order to secure the required quantities. All in all, production disruptions will be supportive, causing the price of Robusta to rise further in the coming period to around USD/ton 2,200 at the end of this year, before retreating slightly in 2017 to about USD/ton 2,000. Despite a reasonably good crop, Arabica will be underpinned in the slipstream of its “little brother” Robusta. Our projection for Arabica is that the price will end 2016 at USDc/lb 155, before sinking to around USDc/lb 145 in 2017.
Supply shortages continue to dominate sugar market
Sugar is the best-performing commodity in 2016, having risen by more than 50% this year. The rally comes after five consecutive seasons of production surpluses, with the ISO (International Sugar Organisation) projecting a shortfall of over 5.7mt for the just ending 2015/16 season and over 7mt in 2016/17. Deficit forecasts made earlier in the year have steadily been revised upwards as production forecasts have slipped. India, the world’s no. 2 producer and largest consumer is now expected to produce around 24M mt, 3.5M mt less sugar in 2015/16, CS Brazil’s declining agricultural yields on account of an aging cane profile are starting to undermine early season production forecasts and the global stock build of the past 5 years is now in reverse and unseasonal weather has depressed production in Thailand. Within W Europe, the wet weather earlier this spring summer has depressed production although Europe have had excellent conditions. The end of the EU’s sugar quotas in Q3 2017 should spur on European production in the coming years, reversing Europe’s role from importer to exporter but the current shortfalls should underpin prices for another crop cycle at least. We forecast a price of USDc/lb 23.00 at year-end 2016 and USDc/lb 22.50 for 2017.
Risks are never far away
Agricultural commodities tend to be highly volatile. As is clear from the above, no clear across-the-board pattern can be discerned. Grains are generally subject to price pressure, while softs are showing a satisfactory upward movement. But here too, risks that could spark short-term price fluctuations are never far away. The biggest risk, of course, is a major weather event. Excessive rainfall, drought or other external impacts can cause sentiment to swing, triggering large price movements. Exchange rates can also play a key role. The chief currencies for commodity prices are the Brazilian real (coffee, sugar), the British Pound Sterling (cocoa) and the US dollar (grains, oil seeds). Other risks that could affect prices in the short term are geopolitical changes and the development of other commodities (oil).