Rabobank forecasts further price rises in a number of agricultural markets in 2011. The Agri Commodity Markets Research Outlook 2011 expects potential price rises to be greatest for corn, soybeans and coffee, while cotton, sugar, and cocoa prices are forecast to ease back from current high levels. In this new report Rabobank agri commodities experts look at the lessons learned from the 2007/2008 food crisis, and list seven key thematic drivers of agricultural commodity markets in 2011.
1. Tightening inventory levels
Rabobank’s Luke Chandler believes that the current price rally is both broader and more structurally based than that of 2007/2008. “Stocks‐to‐use levels in many major products are at or below those seen in 2007/2008, with the exception of wheat. But prices have not responded on the same scale as three years ago. Corn prices, for example, are still 27 per cent below the highs of 2008.” According to the report the difference in the market reaction is partly due to the unstable macro environment in 2010. And energy prices have remained significantly lower than in 2008, providing less support for agricultural prices.
2. Supply limitations
A number of agricultural commodities need to expand production in 2011 to rebuild stock levels, which could cause significant supply constraints. Chandler: “With cotton prices at record highs, a battle for acres is building as farmers decide whether to increase cotton acres over soybeans, wheat and corn.” Other farm‐input constraints such as fertiliser, chemicals, finance, seed, labour and machinery may impede efforts to respond to high prices in 2010. In addition the availability of credit for farmers, and the current strength of the La Niña weather system – which heightens the risk of weather and production variability – could limit supply in 2011.
3. Emerging markets
Emerging economies are rebounding quicker from the global financial crisis than the west and are supporting demand for agricultural commodities. For example, wheat demand in China, Brazil, Russia and India grew at 5 per cent in each of the last two seasons, while it contracted 4 per cent over the same period in the U.S. and the EU. Chandler: “Rapid economic expansion and changing dietary demands will continue to pressure traditional export supplies and encourage further investment in expanding supply, forming a key driver in the shift of the agricultural demand curve.”
4. Chinese demand for commodities
Chinese demand has a particular impact in reshaping agricultural commodity markets for soybeans, sugar, cotton and, potentially, corn. “China has played a key role in transforming the global soybean markets,” explains Luke Chandler. “China now accounts for 60 per cent of global soybean imports, in addition to approximately 20 per cent of world traded soybean. This growth has resulted in expanded planted area in the U.S. and South America as soybeans became a major global commodity.” Chandler expect this tremendous growth to be replicated in other commodities as China’s shifting consumption patterns increase demand.
5. Heightened political risk amid tightening food supplies
As seen in the 2007/08 agricultural bull rally, governments are extremely sensitive to food price inflation, and the potential of supply shortages in 2010 brought a muted re‐emergence of government intervention in agricultural markets. The imposition of grain export restrictions in the Black Sea region sent wheat prices soaring, and the EU decision to allow larger than expected sugar exports spurred a massive sell-off in November. Luke Chandler: “Governments have always played a role in the markets, a trend that in our view is highly likely to continue in 2011.“
6. Fundamentals only part of the story
With agriculture and agricultural futures markets increasingly being viewed as an attractive asset class by investors, the role of outside market macro drivers are becoming more important in shaping agricultural price movements. Currency markets around the globe are playing an ever more important role in agricultural commodity prices. In addition energy prices are expected to increase in 2011, which will impact the price of sugar and corn, commodities used to produce ethanol.
7. Sustained heightened volatility
The combination of tightening fundamentals and increased macro influence and uncertainty is expected to see the increased price volatility witnessed in most agricultural markets in 2010 sustained at high levels into 2011. Chandler: “We expect the volatility which rose in 2010 after dropping during the recession to remain high for 2011 – largely a result of the impact of the other six thematic drivers we have highlighted.”
Macro Economic Outlook
The forecasts for agricultural commodities in 2011 are influenced significantly by global growth assumptions as expressed in the macro economic Outlook 2011. Chandler: “Expectations of continuing macro uncertainty and a mostly two‐paced economic recovery in the year ahead suggest that agricultural demand will continue to rely on emerging markets, be it under a cloud of inflationary uncertainty. The continuation of large, undesirable budget imbalances maintained by many developed economies will only slowly be eroded – with fiscal tightening yet to show any marked improvement in the EU and the U.S.”