Agri Monitor
Group Economics Frank Rijkers
Farmers make hay with low grain prices June 2015 Sustained low grain prices favourable for livestock feed purchases The biggest price decline is for soybeans Price expectations revised up for cocoa, but down for sugar and coffee
Figure 1: Grain price index
Source: Thomson Reuters, ABN AMRO Group Economics
Figure 2: European versus American wheat
Source: Thomson Reuters, ABN AMRO Group Economics
Grain season peters out The 2014/2015 season is almost over for grains (corn, wheat, soybeans), making this an ideal time to take stock. The past year will go down in the books as a record year. Favourable weather conditions fuelled production levels to alltime record highs, bringing grain prices under strong pressure. Major adjustments have taken place compared to the prices at the start of the season (July 2014). Soybean prices showed the sharpest fall, losing 30% in the space of one year. Wheat and corn prices also retreated sharply by 19% and 17%, respectively. Alongside the massive production volumes last season which pushed grain prices to their lowest levels in the past five to six years, the oil price slump, the stronger US dollar and renewed favourable production forecasts for the 2015/2016 season placed a lower floor under grain prices. In the absence of fundamental changes, prices are set to remain stable, with the market continuing to move in a fairly predictable direction. Developments driven by short-term focus Grain price adjustments in this period are brought about by all sorts of short-term factors that affect the market. The first is the progress reports as published by various institutions. These reports provide month-to-month harvest, planting, crop progress and quality updates and compare the new data with the multiyear averages. The report of the United States Department of Agriculture (USDA) is awaited with particular interest every month. The most recent USDA report focuses on the changed soybean data. Plantings are lagging behind "normal" levels due to projected rainfall, leading to a slight correction in the output figures. As a consequence, the price for soybeans has risen over 3% since the last report was published (June,10). Wheat prices, by contrast, lost ground, largely due to the weakened export position of the United States as a result of the strong dollar. The monthly USDA report shows that US exports are lagging behind, while stock levels remain high. This pushed the price in a lower direction in the past two weeks. European wheat quotes (Matif) also fell, on the back of these US figures. The Matif prices fall less sharply than the CBoT notations, because of the USD/EUR exchange rates. However, prices are expected to rise slightly in the coming weeks due to reduced production forecasts in Europe as a result of the sustained drought notably in Germany and France. The differences in EUR- and USD-based trading are causing significant volatility in the wheat market and so does the weather. Wheat is also the biggest faller since the start of this year, with prices shedding almost 20%. The low grain prices are dampening feed prices, which will benefit livestock farmers.
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Agri Monitor - Farmers make hay with low grain prices
Cocoa prices in the grip of Ghanaian production Cocoa is the only agricultural commodity to become more expensive since the start of the year, with prices now almost 12% higher than in January at around USD 3,300 per tonne. The main cause for the upturn in cocoa prices is the news surrounding the sharp decline in Ghanaian production. Output has fallen sharply by more than 20% year on year to about 700,000 tonnes. Ghana accounts for about 1/5th of total global production. A further factor has been the unseasonable weather, too little rainfall during the crucial growing phase in both Ghana and Ivory Coast could put production under more pressure. On the other hand, slowing demand for cocoa from the food processing industry has put a ceiling on the price increases. However, the expected shortfall of 38,000 tonnes, as predicted by the ICCO, has prompted us to revise our price expectations upwards (see table).
Figure 3: "Softs" 2015 price index
Source: Thomson Reuters, ABN AMRO Group Economics
Sugar glut drives prices even lower Besides being closely linked to the Brazilian real (BRL), sugar prices are also strongly affected by new production expectations.
Figure 4: Price movement since 1 January
We calculate that the best financial returns for cane production is to domestic ethanol production which should limit sugar production and export availability to levels seen last season. However, the world market remains under pressure with large carry-over stocks from the previous 4 years of surplus dampening expectations of a price recovery over the medium term. We also anticipate lower growth and higher inflation for Brazil, causing the BRL to weaken (read here). Against this backdrop, we have lowered our price estimates (see table). Prices will however gradually move higher over the longer term.
Source: Thomson Reuters, ABN AMRO Group Economics
Table 1: ABN AMRO price forecasts Q1 2015
Q2 2015
3m
6m
2015 AVG
526
516
500
530
550
Corn (USD/bushel)
387
377
375
395
390
Soybeans (USD/bushel)
992
977
950
910
945
Coffee (Arabica) (USDc/lb)
156
147
125
115
120
Sugar (#11) (USDc/lb)
14.28
13.55
12.00
12.75
13.00
Cocoa (USD/t)
2,865
2,928
3,250
3,100
3,150
Price Wheat (USD/bushel)
Source: ABN AMRO Group Economics
Direction of coffee price is uncertain No clear direction is visible for coffee. Prices have now dropped almost 15% since January this year. This concerns the price for Arabica coffee. Accounting for about two thirds of global production, Arabica is usually the price driver in the coffee market. In addition, virtually all coffee blends are based on Arabica, supplemented with Robusta (the other primary type of coffee). The fall in prices in the past months is partly down to the weakening of the Brazilian real (BRL) and the revision higher of the 2015/2016 crop number. Brazil is a major coffee producer and the depreciation of the BRL has spurred many farmers to put their coffee on the market. However, demand is currently tailing off as roasters have already taken positions and purchased substantial amounts of coffee and also faces the slowdown of the summer period. In addition, many trading houses have revised up their Brazilian harvest forecasts for the 2015/2016 season which is now looking to be 50 million bags plus. This is the reason that we revise our price forecasts slightly lower. In the past weeks the price for Robusta coffee has edged higher. Since late May the price for Robusta has climbed over 20% to around USD 1,850 per tonne. This price increase is due to farmers in Vietnam holding back stocks, waiting for the magical 40,000 VND level. Fear of a possible El Nino event leading to crop damage is also a factor closely monitored.
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Agri Monitor - Farmers make hay with low grain prices
Group Economics | Commodity Research Frank Rijkers Economist Agrifood and Agricultural Commodities tel: +31 (0) 20 628 64 37 frank.rijkers@nl.abnamro.com
Group Economics Commodity Research team Marijke Zewuster (Head)
tel: +31 20 383 0518
marijke.zewuster@nl.abnamro.com
Hans van Cleef (Energy)
tel: +31 20 343 4679
hans.van.cleef@nl.abnamro.com
Casper Burgering (Ferrous, Base metals) Georgette Boele (Precious metals) Frank Rijkers (Agriculturals)
tel: +31 20 383 2693 tel: +31 20 629 7789 tel: +31 20 628 6437
casper.burgering@nl.abnamro.com georgette.boele@nl.abnamro.com frank.rijkers@nl.abnamro.com
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