Looking for optimal conditions

Feature | 28 June 2017

As the monsoon in Asia and El Niño remain a possibility, and unfavourable weather threatens the quality of the wheat harvest in the US, weather monitoring will be paramount, suggests Rabobank research

The S&P Agri Index remained unchanged in May, with the US Dollar Index down 2%. Startling political developments in Brazil caused a 3% depreciation in the Brazilian real and a 5% depreciation in the Argentine peso - but the influence on commodity prices has been limited. With the monsoon arriving in Asia and El Niño still a possibility, we expect more weather volatility around the corner.


The outlook on wheat prices is neutral, but there is a need to monitor weather as quality concerns play their part:

  • Limited impact from early May snowstorm on US wheat crop, but cold weather is impacting protein content.

  • France finally received some decent rains. However, crop is unlikely to fully recover from early-season dryness and other EU countries show yield issues.

  • Positive signal on US wheat competitiveness after successful Egypt General Authority for Supply Commodities (GASC) tender.

Key US wheat areas were exposed to freezing temperatures and a heavy snowstorm in early May, causing markets to rally. However, in hindsight, the impact of the storm on the winter wheat crop has been relatively minor. The United States Department of Agriculture (USDA) downgraded wheat in good or excellent condition by just 2 points on 15 May, after which US wheat markets traded down to levels prior to the snowstorm.

Abundant rains in late April and May have been beneficial for the heading phase of winter wheat, but as the crop matures, warm and sunny weather is required to push protein levels higher. The first Hard Red Winter Wheat (HRW) harvest in Texas indicated protein levels below 10% and yields down 10% to 35%, compared to last year. US weather is forecast to remain cold and wet for the beginning of summer, and as a result, has stimulated some end users to buy additional old-crop wheat to secure higher-protein wheat.

US wheat is - after a two year absence - competitive again in Egypt's GASC tender, supported by a lower US dollar and tight European stocks. Latest World Agricultural Supply and Demand Estimates (WASDE) projected decreasing stocks in 2017/18 for the US, but growing global stocks. Global stocks are expected to grow to 258m tonnes, as consumption of wheat in animal feed is projected to decline. For 2017/18, all major exporters - except the EU and Argentina - will decrease their crop, and the EU is projected to regain export share.

Figure 1: Wheat price forecast marginally higher

Source: Bloomberg, Rabbobank 2017


The corn price forecast remains unchanged as weather-watching continues:

  • After April's planting delays, US corn planting has progressed significantly over the past two weeks and, at over 80% complete, is now ahead of the five-year average. Weather remains a key factor in germination, emergence, and early-season crop development.

  • Argentine and Brazilian corn production is expected to be 131-132m tonnes as favourable crop conditions continue to boost yield prospects.

Corn price forecasts are maintained month-on-month, as US planting progress gets back on track and short-term weather outlooks seem largely favourable for global corn crops. We expect Chicago Board of Trade (CBOT) corn prices to remain largely range-bound, trading between US$3.50/bushel (bu) and US$3.80/bu in the short term, but a bullish bias remains.

US planting is now in line with the five-year average, at 84% complete. After a wet end to April across large parts of the US corn belt raised concerns of planting delays and potential yield losses, significant progress was made in the first few weeks of May. Of concern in the short term is the impact of the cooler conditions on crop emergence and growth, which will be behind recent years'.The May USDA WASDE was seen as supportive for corn prices and offered the first look at 2017/18 global balance sheets. The USDA forecast a 28.63m tonne year-on-year (yoy) decline of global corn ending stocks, to 195.27m tonnes for the 2017/18 season. The ending stock forecast was at the low end of market expectations and was supportive of prices immediately after the release.

The sharp 4m yoy reduction in US planted acres (ac), together with the USDA forecast yield of 170.7 bu/ac, is expected to see 2017/18 US corn ending stocks fall 8%, to 2.11bn bu. Such a yield is above trend, and we therefore currently predict a stock reduction of 15% yoy. However, a 2.3bu/ac increase in yields to the USDA's forecast, to 173bu/ac - some 1.6bu/ac below last year's record - would be enough to see US stocks rise for a fifth consecutive year.

Argentine and Brazilian corn production is expected to be 131-132m tonnes for the 2016/17 season, up from 96m tonnes last year, as favourable conditions continue to boost yield prospects. South America, therefore, will compete stronger on the export markets with US corn.

Figure 2: Corn price forecast

Source: Bloomberg, Rabbobank 2017


CBOT soybean price forecast is unchanged as Brazilian farmers wait for more attractive prices:

  • After slower than average farmer soybean selling pace, the recent decline in the real encourages additional soybean sales from Brazilian farmers.

  • US planting progress is marginally ahead of the five-year average, at 53%.

  • Strong US exports might weaken soon, with more South American competition. US crush has already slowed.

Our CBOT Soybean price forecast remains unchanged month-on-month, reflecting a market which remains relatively range-bound, but susceptible to short-term weather-driven volatility. It is expected to trade either side of US$9.50/bu in the short term, with some upside potential into Q3 2017 amid heightened US weather risks. US soybeans are now 53% planted, as more favourable weather enabled significant planting progress to be made.

US 2016/17 soybean exports have continued to outperform week-on-week, and soybean export inspections for the season total 50.4m tonnes, up from 43.3m tonnes at the same time last year. China again features prominently, supporting our view that the USDA should increase Chinese soybean imports for the 2016/17 season to 90m tonnes or above. US soybean crush has been slow in April, as meal exports slowed considerably.

Farmers in Brazil have decided to hold onto soybeans rather than sell at current price levels, helping to support global soybean prices. Through May, farmers in Mato Grosso have reportedly only sold 69% of their soybeans, compared to 85% on average for this time of year.

The recent fall in the real - a result of the political volatility surrounding President Temer - provided a sizeable incentive for farmers to sell commodities, and therefore we expect selling to be much further progressed by the end of May. We forecast Brazilian soybean production between 112m-113m tonnes for the 2016/17 season, approximately 1m tonnes above the current USDA forecast.


ICE No. 11 Sugar price forecast is maintained:

  • Prices have hit our forecast therefore, we remain largely neutral.

  • Changes in China's import duties.

  • The weather in São Paulo has been wet, and more disruptions could potentially lower the availability of cane over the season. But the weather in South-East Asia looks good.

Political developments in Brazil caused a 7% daily drop in the USD/BRL on 18 May, which only translated into a 1.7% drop in ICE sugar futures by the end of the day. Normally when sugar prices are close to the ethanol parity, the elasticity gets close to 0.4-0.5. However, unseasonal rains in Brazil have been causing disruptions in the harvest, which has supported sugar prices.

China decided to increase the out-of-quota (OOQ) import tariffs from the current 50% to 95% in the coming 12 months, then dropping to 90% and 85% in the following two years. The decision was largely expected and has hardly moved the market. However, we are left with many questions.

How much more sugar will make its way into China through unofficial channels? And will sustained high prices cause much of a supply response within China's own sugar sector? The divergence of international and internal prices in China has been rising through 2017, reaching close to record levels. In principle, China is expected to expand sugar production by around 1m tonnes in the 2017/18 season. If the country manages to sustain this level of internal price for long, we may see several annual production increases in the next three years.

Much of the surplus expected in 2017/18 hinges on very good Asian crops. At the moment, the monsoon is expected to bring normal levels of rainfall. If it brings anything less, the market should have a quick reaction. The same can be said of Brazil. If the wet weather continues, creating further disruptions to the harvest, we may see some cane not being harvested this season - and, of course, a lower sugar content in the cane harvested during, or immediately after, the rains. Either of these two factors is likely to attract some funds back to the market.

Figure 3: Sugar maintains its price

Source: Bloomberg, Rabbobank 2017


There is a marginal reduction in our nearby forecast for coffee, but we are still bullish:

  • Weather has been wet across Brazil, which is supportive of the market, even if volumes are not affected.

  • We see strong demand for coffee, which increases our expected deficit for 2017/18.

We remain relatively bullish through 2017. ICE Arabica has lost 3% in the first three weeks of May, but the drop was largely due to the weakness of the Brazilian real. However, news from Brazil seems to indicate that not much more business is taking place at the moment.

As current demand seems to be strong in markets that were expected to be flat (the EU, Japan), we also need to increase the rate of growth in the coming seasons, which in 2017/18 results in a supply deficit of 6.8m bags. With a recovery in Brazil (both arabica and robusta) and Vietnam, global supply could easily jump by 10m bags in the 2018/19 season.

However, this amount would, in principle, only result in a balanced market if we assume global demand grows 3.2m bags per year. To see a good recovery of the stocks-to-use ratio, we would need to see very good weather globally, especially in Brazil during the flowering season. We would also need to have growth in smaller producing countries, such as those in Central America.

We see very little growth of milds in Latin America, at prices close to US¢130/lb. Even though we would still remain positive about output in Colombia, Peru, and, to a lesser extent, Honduras, a significant quantity of non-certified/premium mild coffee in Latin America will struggle to be competitive. With increasing consumption and a rather low arbitrage, we could be in a position in which the 2017/18 mild crops will probably struggle to meet demand.

This is an extract from Rabobank's outlook report, 'May 2017: Politics and weather at play'. It has been republished here with permission

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