Speculators, who have been big players in ag markets such as soybeans and sugar this year, will remain “quite active” in 2017, Rabobank said – naming cocoa as its most bullish bet for next year, and coffee the most bearish.
The appeal of ags to hedge funds “is unlikely to change in 2017”, Rabobank said, citing the quest by investors for yield at a time of low borrowing costs.
“Interest rates are expected to rise only very slowly, keeping investors looking for higher returns,” the bank said, adding that index funds may also “be back in the market toward the second half of next year”.
“The interest in commodity index funds, which offer a hedge against inflation, may be rekindled if fear of inflation reappear,” with Rabobank noting “a few signs”, from the likes of bond market spreads, that the pace of global price rises may “slightly increase” next year.
However, the bank said that it was “not obvious” that speculators would next year continue to focus on the coffee, cotton, soybeans and sugar which have held particular appeal in 2016.
Indeed, Rabobank named the coffee market – one of this year’s top performers, with New York arabica futures up more than 30% so far, and London robusta gains topping 40% – as its most bearish bet for 2017.
While forecasting a fourth successive world output deficit in 2017-18, of some 2m bags, the bank flagged the potential for currency weakness in producer countries, by supporting local coffee prices, to encourage selling.
“Weaker Latin American currencies, after the surprising US elections, may incentivise selling from Latin America, creating bearish sentiment in the market,” said the bank.
And production prospects in much of Latin America are “good”, with initial signs, for instance, suggesting “another strong crop” in Peru in 2017-18.
The bank foresaw arabica futures ending next year at some 149 cents a pound, well below the 170.70 cents a pound at which the December 2017 contract was trading at on Wednesday, with robusta futures seen dropping to $2,040 a tonne rather than rising to $2,113 a tonne as the market expects.
China to export corn?
Rabobank also named corn and wheat among its most bearish bets, seeing Chicago corn futures averaging $3.55 a bushel in the last three months of next year – compared with the $3.84 ½ a bushel that investors are pricing into the December 2017 lot.
While foreseeing world corn inventories falling in 2017-18 for the first time this decade, the bank highlighted the release of supplies from China’s huge state stockpiles – a factor which could “turn the country into a net exporter” of the grain.
“Due to changes to the corn subsidy policy, the country is expected to cut its stocks by about 10m tonnes in 2016-17 and my almost twice as much the year after.”
For wheat, Chicago futures were forecast rising, but to a modest $4.60 a bushel by the close of next year, again comfortably below the futures curve, thanks to a world 2017-18 harvest pegged at 727m tonnes – down 1% year on year, but not by enough to allow much of an erosion in the world’s record inventories.
“A major production shock in at least two major producing regions will be required to substantially cut global stocks, and to drive prices higher.”
‘Very strong demand’
However, Rabobank was more upbeat on prospects for Chicago soybean futures, seeing them return to some $10.70 a bushel in the spring, ahead of the $10.41 a bushel that the May 2017 contract was trading at.
Prices would be “underpinned” by growth of 2% in world demand for the oilseed, with China’s important imports in 2017-18 seen growing by 3.5% to a fresh record high of 89m-91m tonnes.
“Global soybean demand remains very strong, driven by an expansion in global animal protein production, and a 6.6% annual increase in crush over the past three years.”
Sweet on cocoa
The bank rated cocoa as it most bullish ag bet for next year, forecasting New York futures closing the year at some $2,620 a tonne, comfortably above the $2,448 a tonne at which December 2017 futures were priced at.
While highlighting the prospect of a second successive world production surplus in 2017-18, Rabobank highlighted the potential for better demand, after a “lacklustre” 2016 for consumption volumes.
“Volume sales of chocolate are stabilising in Europe and especially in the US.
“In addition, we believe that sales of chocolate and chocolate-flavoured products may be doing rather well in Asia.”