Will rain come? Commodity markets watch the weather as harvest seasons arrive

Feature | 24 March 2017

The strengthening position of the Brazilian real will play a part in supporting sugar prices in 2017, while corn prices look likely to see volatility through spring as the market prices a large shift of US corn acreage to soybeans, Rabobank data suggests

Markets are watching weather developments at a crucial time for many crops. The South American corn and soybean harvest has begun and the market is looking out for climatic risks. Wheat and sugar markets are monitoring EU weather, while Indian sugar production has been impacted by dryness. Looking forward, the United States Department of Agriculture's (USDA) 31 March plantings and stocks reports are seen as a catalyst for price volatility.


Matif forecast maintained while Chicago Board of Trade (CBOT) is adjusted higher:

  • A combination of Black Sea cash market strength and a bullish February World Agricultural Supply and Demand Estimates (WASDE) drives US price strength;

  • CBOT prices above USc500/bushel (bu) in 2017 are unlikely without a regional shock for a key producer; and

  • Early winterkill estimates appear small, with EU impact confined to the south/south-east and Russian impact estimated at just 3%.

Rabobank maintains a supportive outlook for international wheat prices through 2017, having revised our Q4 2017 forecast to USc485/bu in light of year-to-date price support; combination of Black Sea cash market strength and a bullish February WASDE. Our bullish view continues to be derived from a 2% decline in global production in 2017/18 and a US supply deficit, underpinned by acreage cuts.

With global stocks remaining a bearish driver, we see sustained CBOT prices in 2017 above USc500/bu as unlikely without the presence of a regional shock for a key producer, resulting in a global 2017/18 deficit year. Current estimates highlight a marginal 1.5 million tonne global surplus. The coming months will see the euro become increasingly prominent for Matif wheat as elections in France, Germany, and the Netherlands drive volatility.

A slow strengthening is forecast in the EUR/US$ to 1.1 in Q4 2017, assuming Ms. Le Pen loses the second round of the French presidential election. Furthermore, the premium of Matif over CBOT, in US$/tonne terms, is expected to diminish marginally through 2017, as the EU crop recovers and the US runs a 200 million bushel supply deficit.

Figure 1 - EU 2017/18 wheat production forecast

Source: USDA, Rabobank


Smaller-than-anticipated shift away from US corn planted acres becomes a major bearish risk factor:

  • We forecast a 2.5 million year-on-year (YOY) acre reduction in US planted corn acreage, to 91.5 million acres, to be bearish for corn prices in the short term;

  • South American corn crops have improved, with Brazil and Argentina expected to produce 85.8 million and 36.1 million tonnes respectively, for the 2016/17 season; and

  • Corn prices are expected to remain under pressure from high global stocks of competing feed products.

Corn prices are at risk of increased volatility over the next month, as the market tries to determine how many US corn acres will be planted this year. Rabobank expects an increased likelihood of increased volatility in March, as the market attempts to price in the shift in stocks and US planted acres both before and after the 31 March reports.

We anticipate 2017/18 US corn planted acreage to fall by 2.5 million to three million acres, from 94 million acres planted in the 2016/17 season. Such a US corn acreage cut will still likely be bearish for corn prices, as we expect the market is currently pricing a larger shift of corn acreage to soybeans. Historically, the March reports are a catalyst for significant price volatility, with four of the last five largest daily price movements for the first quarter of the year being on the day of the report.

CBOT Corn prices have traded a relatively tight range and appreciated just 2.62% through February. Improving South American weather kept markets from rallying significantly, while speculative funds kept the market trending higher through the month. Interestingly, Managed Money funds have continued to build their net long position in corn through February, after switching in January out of their net short position which they held from July 2016.


CBOT Soybean price forecast is increased due to a lower shift in US planted acreage:

  • We forecast a three million acre YOY increase in 2017/18 US planted soybean acreage, to 86.4 million acres, below average trade estimates and a likely bullish driver for prices;

  • Brazil forecast to produce 105.5 million tonnes of soybeans, up 9 million tonnes YOY; and

  • US domestic soybean demand remains robust, with the National Oilseed Processors Association (NOPA) reporting a 160.6 million bushel in the January 2017 Crush Report, compared to 150.45 million bushel for January 2016.

Soybean prices are expected to be increasingly volatile for the current month (March), with weather risk still present for South American crops and ahead of the USDA's planting intentions report due on 31 March. We currently estimate 86.4 million acres to be committed to soybeans across the US, a year-on-year increase of three million acres. The range of trade estimates on US acres planted to soybeans is quite wide, with most estimates currently ranging from 86 million to 91 million acres.

With a tight balance sheet relative to corn and wheat, an acreage at the lower end of the above range in 2017/18 would be seen as bullish for prices in the near term. The March planting intentions report isn't typically as volatile for soybean prices as it is for corn. However, given the relative tightness in the global balance due to strong demand, an acreage number lower than market expectations could create short-term volatility than in recent years.

Figure 2 - Brazil 2017 soybean production forecast

Source: USDA, Rabobank


ICE #11 Sugar price forecast is unchanged:

  • April is likely to see volatility from EU plantings, the Brazilian centre-south (CS) crop, and a potential El Niño in mid-2017;

  • The strength of the Brazilian real is keeping prices from falling to the ethanol parity any time soon; and

  • India produced 14.7 million tonnes YOY to mid-February, below the 17.3 million tonnes produced last year.

April is likely to see some volatility coming from EU plantings and also from the start of the Brazilian CS crop, not to mention a potential El Niño later in mid-2017. There is also lack of agreement about the amount of cane that Brazil CS can produce, with estimates ranging from 570 to 625 million tonnes. However, we believe most market players are in agreement that India will have to import sugar this year: between one and two million tonnes.

To mid-February 2017, India produced 14.7 million tonnes of sugar, below the 17.3 million tonnes produced in the same period last year. ISMA has reported that about 80% of the mills in Maharashtra and 95% of mills in Karnataka have closed. As of 15 February, only 292 mills were in operation in India, as opposed to 472 last year.

The proportional rate points to production below 20 million tonnes. However, there is reason to believe the rate of mill closures will now slow down, given that the mills in Maharastra and Karnataka are already closed. It has also been drier than usual in India in the last three months, and original expectations for a large crop in 2017/18 have now dropped to a more average 25 million tonne level. A potential El Niño could bring further dryness to India in late 2017.

Figure 3 - Strength of BRL means sugar prices are unlikely to reach parity with ethenol

Source: USDA, Rabobank


A bearish view is maintained on ICE Arabica:

  • The recent decline of the stocks-to-use ratio worldwide, to 31% at the end of this season, is keeping prices supported

  • Continuous appreciation of the Brazilian real, to near BRL 3.0/USD

  • The differentials of Brazil Arabica coffee could strengthen in 2017

  • Robusta deficit continues to support prices.

There are basically two main factors supporting prices, despite the large amount of consumer stocks worldwide. The first is the decline of the stocks-to-use ratio worldwide, which went from 40% at the end of the 2013/14 crop to 35% as of last September. It is expected to drop further to 31% at the end of the current season (and potentially even lower in 2017/18). The other factor is the continuous appreciation of the Brazilian real, which is within spitting distance of BRL 3.0/US$, a level not seen in almost two years.

Will these two factors last? We'll avoid any currency views for the time being, but the decline of the stocks-to-use ratio is happening, given a lack of any significant recovery in Brazil Robusta, and an expected offcycle in Brazil Arabica areas. We believe this status quo is going to remain in the market, at a time when traders and roasters are happy to carry coffee (interest rates are low, and the Arabica market is in good carry) until the market reacts to a potential super crop in Brazil next year-with a likely upcycle in Arabicas and full recovery in Robustas-not to mention a potential record crop in Vietnam.

The differentials of Brazil Arabica coffee could strengthen in 2017. Honduras and Colombia are likely to keep pouring coffee into the market. This coffee is very gradable at the NY exchange. The strength of the inverse certified stock price correlation is likely to be strong enough to tempt trading on the back of it, even if the global stocks-to-use ratio (a much less visible indicator of stocks) is declining. Brazil is facing a likely offcycle in Arabicas and given that the futures level may be depressed by the high availability of milds, the Brazil differential may be the variable of adjustment.


Cocoa price forecast has been revised down based on recent stock data from the International Cocoa Organization (ICCO):

  • ICCO reported almost no decline in 2015/16 global stocks-a year expected to report a supply deficit;

  • Low international prices continue to impact Côte d'Ivoire's export industry; and

  • Multi-year low prices are expected to incentivise consumption during Q2 2017.

A surprise from the ICCO annual stock survey drives a downward revision in our cocoa price forecast, across the curve. The release showed almost no decline in 2015/16 global stocks, a year that was widely expected to report a supply deficit. Looking ahead, the revision could mean additional carryover into the 2016/17 season, a year in which excellent prospects for West African growers results in a 0.26 million global supply surplus.

This perceived oversupply has been duly noted by 'Managed Money', which, as of 14 February, holds a record -26,561 lot short position across the ICE NY. Similarly, Managed Money hold a near-record -22,180 position across ICE London. The question now is, how much shorter can this fund money go? Our answer: not much. Despite recent price action, our forecast remains supportive as low prices slowly incentivise global demand, likely by Q3 2017.

Low international prices are having a significant impact on Côte d'Ivoire's export industry. Domestic arrivals, which increased 1% YOY, to 1.187 million tonnes as of 12 February, may not be illustrating the full extent of harvested volume in the region, as some traders (unable to afford beans for the export licences they hold) are reportedly having to default on contracts that are not hedged.

The country is continuing to sell forward, but with demand currently cut and alleged high availability, pressure inevitably falls on the minimum government price paid to growers, at CFA 1,100/kg. However, a number of political and moral obstacles stand in the way of a reduction cut, and the government's Coffee and Cocoa Council (CCC) is providing advance payments to encourage purchasing and alleviate supply

This article is an extract of Rabobank's 'February 2017: What to plant next' outlook report. It has been republished here with permission

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