Stem strength

Feature | 30 November 2016

Frank Rijkers says exchange rate volatility could tip the scales as he separates
the bloomers from the free fallers in agricultural commodities

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 last year, 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 have 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 US$c485/bushel.

Corn output soars to new heights

On balance, the price of 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 forecast for end-of 2017 is US$c390/bushel.



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 US$c1,065/bushel at year-end 2017.


While 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, 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, with the International Cocoa Organization forecasting a 212,000mt (million tonne) 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 Côte d'Ivoire, with quality and quantity concerns in the delayed early stages. Global demand currently appears to be stable and adequate stocks in Europe should help the European processors, while domestic grinding in origin will likely continue to feel the pinch until the end of the year.

The short term outlook is that deficits don't get reversed quickly and can only be achieved 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 recovery. We expect prices to rise to US$3,000/tonne by the end of 2016. Looking to 2017, the market anticipates higher production, allowing prices to sink towards US$2,800/tonne.

Coffee price up on Robusta production problems

After bottoming out of a down trend lasting almost 18 months, the coffee markets found a change 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 (year-to-date). 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 over to a lower grade Arabica bean 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 US$2,200/tonne at the end of this year, before retreating slightly in 2017 to about US$2,000/tonne. Despite a reasonably good crop, Arabica will be underpinned in the slipstream of its 'little brother' Robusta. Our projection for Arabica is that the prices will end 2016 at US$c155/lb before sinking to around US$c145/lb 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 International Sugar Organization projecting a shortfall of over 5.7mt for the season ending 2015/16 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 second largest producer and biggest 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 five years are now in reverse and unseasonal weather has depressed production in Thailand.

Within Western Europe, the wet weather earlier in the spring and summer seasons depressed production, although the rest of Europe has had excellent conditions. The end of the EU's sugar quotas in Q3 2017 should spur on European production in the coming years, reversing the continent's role from importer to exporter, but the current shortfalls should underpin prices for another crop cycle at least. We forecast
a price of US$c23.00/lb at year-end 2016, and US$c22.50/lb 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 and sugar), the British pound (cocoa) and the US dollar (grains and oil seeds). Other risks that could affect prices in the short term are geopolitical changes and the development of other commodities (oil).

Frank Rijkers is an economist in the agrifood and agricultural commodities department at ABN AMRO

This article is an extract from the ABN AMRO report, Divergence in agricultural price levels. For the full report, see

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