Marketing Communication July 217 Agri Commodity Markets Research July 217: Weather Volatility Ahead RaboResearch Food & Agribusiness far.rabobank.com Stefan Vogel Head of ACMR +44 2 7664 9523 Carlos Mera Senior Commodity Analyst +44 2 7664 9512 Graydon Chong Senior Commodity Analyst +44 2 7664 9579 Charles Clack Commodity Analyst +44 2 7664 9756 The S&P agri index remained virtually unchanged in July. Sugar and arabica coffee were well supported by a 4.9% appreciation of the Brazilian real during the period, but the wheat rally came to a halt. As we move to the critical growing phase of US G&O, we see a lot of weather volatility ahead. WHEAT SUGAR Short-term strength, long-term pressure ICE #11 Sugar price forecast increased and still Continued volatility in global markets as the Northern bullish Hemisphere harvest is underway Currency influences and the hike in gasoline & Rabobank holds a bearish longer-term price view, on ethanol taxes are bullish for sugar 218 US acreage rises and global output recovery These increased price levels are more sustainable in Unfavourable weather persists for US and Canadian time. But funds pose a large upside risk spring wheat. Further deterioration looks likely Summer is here: low volumes and high volatility CORN COFFEE CBOT Corn price forecast revised marginally higher as US weather drives higher volatility In our view, corn prices will continue to largely trade between USD 3.6/bu and USD 4.1/bu in the short term, but upside risk exists on weather developments across the US Plains and Midwest In our view, prices are factoring in a US yield closer to 165bpa than the current 17.7bpa used by the USDA SOYBEANS Neutral on arabicas, bearish on robustas ICE Arabica prices are up 4% so far in July, helped by the Brazilian real A long dry period favoured the arabica harvest in Brazil Low warehouse stocks, but potentially higher arabica farmer stocks COCOA CBOT Soybean price forecast increased amid heightened US production risks; however, heavy stocks expected to eventually weigh on prices CBOT soybean prices are expected to average USD 9.7/bu through Q3 217, but we forecast prices through Q4 217 and Q1 218 to trade below the current forward curve US stocks-to-use is expected to remain high PALM OIL Cocoa prices jumped about USD 4/tonne since the end of June ICE NY Cocoa second contract increased 2% since the end of June (to July 24) and 1% since the July bottom Grindings came in at excellent levels, supporting an annual increase of about 4% for the season COTTON Bearish view maintained on palm oil prices Malaysian palm oil production to increase in July 217, after a significant 8.5% MOM reduction in June Global demand for palm oil to remain relatively low in the short term, due to high vegetable oil supplies, and stocks in India and China Weather risk keeps near-term contracts supported, followed by harvest price pressure Weather-focused trade as US crop enters critical development period; crop conditions and abandonment ratings remain key Support to remain until higher confidence in US crop prospects low-case scenario of USc 63/lb 1/12 RaboResearch Agri Commodity Markets Research July 217
Percentage of total acreage USc/bu USc/bu Wheat Short-term strength, long-term pressure Wheat price forecast increased, but maintains a bearish price view vs. the futures-forward curve Unit Q4'16 Q1'17 Q2'17 Q3'17(f) Q4'17(f) Q1'18(f) Q2'18(f) Q3'18(f) CBOT USc/bu 43 429 47 5 49 51 52 5 Matif EUR/tonne 163 17 164 175 177 18 175 173 Continued volatility in global markets as the Northern Hemisphere harvest is underway Rabobank holds a bearish longer-term price view, on 218 US acreage rises and global output recovery Unfavourable weather persists at least in the short term for US and Canadian spring wheat. Further deterioration in conditions looks likely Russian production to match, or come close to, last year s record production, spelling concerns for quality Continued volatility in global wheat futures, with US weather developments behind the dramatic price shifts. Following June s sharp rally, both CBOT and Matif Wheat have slumped 13% and 6.4%, respectively, through July, following an unexpected positive USDA estimate and diminishing fund interest. Contrastingly, Minneapolis remains relatively firm, at three-year highs of USc 75/lb a function of continued hot, dry conditions in the US Western Midwest and Canadian Prairies, and subsequent deterioration in US crop conditions (now rated 33% GD/EX vs. the 67% five-year average). Renewed volatility has brought a flurry of fund-buying and, more recently, some selling too as of 18 July, Managed Money cut their net long slightly, to 35,926 lots. But while global quality supplies are surely tightening in 216/17, wheat stocks remain abundant, at 255m tonnes. Rabobank expects volatility to remain and continued weather risk to drive shortterm strength. However, longer-term prices are forecast to soften for both CBOT and Matif as global stocks plateau, although tightness in quality wheat should see high-protein spreads endure or strengthen. Estimates for US Hard Red Spring production in 217/18 range widely, at 2m to 385m bu. Also, the scope for further condition deterioration appears likely in the future, with little relief from these unfavourable conditions forecast across the US Midwest and Canadian Prairies in the ten-day period. US spring wheat crop conditions have deteriorated sharply through 217, now rated just 33% GD/EX There are few doubts that the extent of US HRS losses will be felt globally, as US wheat export expectations are cut to 26m tonnes. The question on everybody s mind is: Where will quality grain be sourced next season? With the US, Canada, and Australia having felt the pinch, it will be the likes of the EU and Black Sea which could see heightened demand for quality grain. This will maintain higher cash premiums for spring wheat through 217, until higher prices incentivise greater acreage next season and a subsequent price fall come Q1 218. Looking ahead to 218, Rabobank expects CBOT prices near USc 5/bu to incentivise a boost in US wheat acreage which coupled with a yield recovery in other key exporting countries and in the absence of an unexpected weather event drives our bearish view vs. the futures-forward curve. Also, CBOT time spreads are partially a function of variable storage rates (VSR), which can exaggerate carry in the curve. While 217 has its fair share of production troubles, Russia remains the rose among the thorns for new-crop wheat now 11% harvested. Latest estimates peg production at, or very near, last year s record 72m-tonne harvest, although some cold temperatures and heavy rainfall could bring headaches. But if realised, these big yields are not necessarily wanted or needed. High yields will likely draw down on protein levels, at a time when traders are running out of options for +12.5% protein wheat. Hot, dry conditions in key US spring wheat regions drive the MBT CBOT price spread to six-year highs 9% 8% 7% 6% 5% 4% 3% 2% 1% % 9 8 7 6 5 4 3 2 3 25 2 15 1 5 5 Yr. Range 5 Yr. Average 216 % Good/Excellent 217 % Good/Excellent Condition Minneapolis-CBOT Spread (RHS) Minneapolis Wheat CBOT Wheat Source: USDA, Rabobank 217 2/12 RaboResearch Agri Commodity Markets Research July 217
Percentage of total acreage Corn CBOT Corn price forecast revised marginally higher as US weather drives higher volatility In our view, corn prices will continue to largely trade between USD 3.6/bu and USD 4.1/bu in the short term, but upside risk exists on weather developments across the US Plains and Midwest In our view, prices are factoring in a US yield closer to 165bpa than the current 17.7bpa used by the USDA Spring wheat is likely to help support corn prices as US and Canadian crop suffer through continued drought conditions Corn price forecasts unchanged MOM as US weather takes centre-stage. In our view, corn prices will remain volatile in the short term, as US corn crops enter the crucial silking and pollination stages of development. The USDA is currently using 17.7bpa for the 217/18 US corn yield, and we believe revisions lower to between 165bpa and 168bpa will be required, given the persistent hot and dry conditions across the northern US plains and north-western Midwest over the past month. A continuation of hot and dry conditions could see this yield estimate fall further, although we note that US ending stocks are robust, and 217/18 corn yields would need to drop below 166bpa in order for US stocks to decline to fewer than 2.bn bu. The major weather risk we see in the short term is a dry pattern developing over western and into central Iowa, where 84% of the crop was reportedly silking as of 23 July. Temperatures have been high, but forecasts for the next week do show some relief in cooler overnight temperatures and high humidity levels. Improving conditions should allow for more favourable pollination conditions for earlier-planted corn. US corn conditions rated good to excellent have declined to 62% vs. 67% three weeks ago. The weather volatility has impacted fund movement in corn positions dramatically over the past month, and we Weather for the US Northern Plains and Midwest looks to remain dryer than average for the next week CBOT Corn forecast raised slightly MOM on higher US production risk Unit Q4'16 Q1'17 Q2'17 Q3'17(f) Q4'17(f) Q1'18(f) Q2'18(f) Q3'18(f) Corn USc/bu 348 364 363 375 37 38 395 4 expect price volatility over the next month to be exacerbated by speculative fund movements. After holding net short positions for 16 consecutive weeks, Managed Money traders have moved over the last three weeks to build net long positions which stand at 14,67 lots long as of 18 July. Given the large carry-out stocks (set to exceed 2bn bu in the US), we view fund net length as a bearish risk factor if continued crop deterioration does not occur. Even a 7bpa reduction in yield from current USDA forecast, to 163bpa, would still only see US ending stocks drop to levels seen in 214/15 and 215/16, at ~1.73bn bu. In this event, prices would rally. The Brazilian real has appreciated ~5% against the US dollar over the past month, pressuring local commodity prices and disincentivising growers from selling corn. Corn prices have reportedly fallen by 6% YOY, as additional supply and a stronger real continue to pressure domestic prices. The safrinha corn harvest is half over, and Conab has increased its safrinha corn production estimate by 2.1m tonnes in July, to 65.6m tonnes. The additional availability of corn this year is expected to cause export markets to be increasingly competitive. The corn harvest in Argentina remains slow, with only just over 5% complete due to high moisture in the crop and wet harvest conditions. We maintain our production forecast of 39m to 4m tonnes. US corn crop conditions continue to fall, with 62% of the crop now rated good to excellent 9% 8% 7% 6% 5% 4% 3% 2% 1% % 5 Yr. Range 5 Yr. Average 216 % Good/Excellent 217 % Good/Excellent Condition Source: NOAA, Rabobank 217 Source: USDA, Rabobank 217 3/12 RaboResearch Agri Commodity Markets Research July 217
Percentage of total acreage USc / bushel Soybeans CBOT Soybean price forecast increased amid heightened US production risks; however, heavy stocks expected to eventually weigh on prices CBOT soybean prices are expected to average USD 9.7/bu through Q3 217, but we forecast prices through Q4 217 and Q1 218 to trade below the current forward curve Despite some concerns over dryer conditions, US stocks-to-use is expected to remain historically high, at above 1% for the 217/18 season Our CBOT price forecast has been increased MOM, reflecting the current US weather risk premium being built into grain & oilseed prices. CBOT Soybean prices are expected to average USD 9.7/bu through Q3 217, but we forecast prices through Q4 217 and Q1 218 to trade below the current forward curve, as US new-crop supply availability and global stocks-to-use expectations of above ~27% for the 217/18 season continue to weigh heavily on markets. We forecast US soybean yields at 47bu/ac amid hotter and dryer-than-ideal conditions for parts of the US Midwest. Our forecast is 1bu/ac below the current USDA forecast of 48bu/ac, and we note that further cuts are possible if US crop conditions continue to deteriorate. US crop condition ratings have slipped to 57% of the crop rated good to excellent as of 23 July, down 4% WOW and down from 71% at the same time last year. Soybean areas have not been as heavily impacted by the recent hot and dry conditions impacting the Northern Plains and western Midwest; however, the crop is coming into the pod-filling stage of development, and therefore weather over the next month will be crucial to determining final soybean yield potential. Despite some concerns over dryer conditions, US stocksto-use is expected to remain historically high, at above 1% for the 217/18 season. Global soybean ending stocks for CBOT Soybean forecast increased MOM as weather premiums are built into US grain & oilseed prices Unit Q4'16 Q1'17 Q2'17 Q3'17(f) Q4'17(f) Q1'18(f) Q2'18(f) Q3'18(f) Soybeans USc/bu 999 1,21 945 97 96 97 98 99 1,6 1,4 1,2 1, 8 217/18 are expected to marginally contract YOY by 2m to 3m tonnes, with increased Chinese demand and smaller South American crops the main drivers. In July, the USDA moved to raise Chinese soybean imports by 1m tonnes for 216/17 and 2m tonnes for 217/18, to 91m and 94m tonnes, respectively: more consistent with our forecast for Chinese soybean imports. Funds have lengthened speculative positions as US crop conditions deteriorate. After 13 consecutive weeks of net short positions, Managed Money funds bought over 157, lots in the three weeks to 18 July, to hold a net long position of 38,351 contracts. The shift in market sentiment is expected to take some heat out of the market, with speculators already having covered the growing risk of production downgrades. CBOT Soybeans Previous forecast Rabobank forecast Contributing to our softer price outlook is the pending availability of South American stocks. A rally in the Brazilian real, coupled with low commodity prices, has meant selling of soybeans to date by Brazilian farmers has been historically slow. This coupled with the added incentive of reducing export taxes for Argentine exporters from early 218, by.5% per month contributes to our price forecast view of softer soybean prices for Q4 217 and Q1 218. After falling 4% this week, US soybean conditions are slightly below average, at 57% good to excellent Chinese soybean import demand is expected to increase by 3% to 4% for the 217/18 season, to 93m to 94m tonnes 8% 7% 6% 5% 4% 3% 2% 1% % 5 Yr. Range 5 Yr. Average 216 % Good/Excellent 217 % Good/Excellent Condition Source: USDA, Rabobank 217 Source: USDA, Rabobank 217 4/12 RaboResearch Agri Commodity Markets Research July 217
Million Gallons US Dollar Index (DXY) Soymeal and Soy Oil Soymeal and soy oil price forecasts have been increased slightly MOM as weather premium builds Both soymeal and soy oil futures are trading at the upper end of their current trading range and are likely to stay there as long as US weather concerns persist USDA 216/17 season crush seems 2m to 3m bu too high Despite dry conditions in US Northern Plains and southern Saskatchewan, canola-growing areas are doing better than a year ago Our soymeal and soy oil price forecasts are largely unchanged from last month, despite increased price volatility due to US weather concerns. Futures for both products have followed the soybean price increase. Soymeal futures are trading within the range established after the 216 harvest, but in the upper quartile of the range. Meanwhile soy oil futures are trading at the upper end of their trading range (.31-.35) that has been in place since the beginning of 217. Soybean crop conditions will have to deteriorate further in order for prices to rise beyond these established trading ranges. The US Environmental Protection Agency (EPA) released its proposed renewable fuel mandate volumes through calendar year 219. While ethanol and cellulosic biofuels decreased, biodiesel received a slight bump, from 2.bn gallons in 217 to 2.1bn gallons for both 218 and 219. Year-to-date, soy oil usage in the US for biodiesel is running 1.5% ahead of last year. Rabobank expects continue solid demand for soy oil from the US biodiesel sector. The drought in the US Northern Plains and parts of the southern Canadian Prairies remains a concern. Stats Canada recently released its first Crop Condition Assessment: Southern Saskatchewan crops conditions are rated much lower than a year ago. However, the major canola-growing areas of the Prairie Provinces are showing similar or better crop conditions. CBOT Soymeal and Soyoil revised marginally higher Unit Q3'16 Q4'16 Q1'17 Q2'17(f) Q3'17(f) Q4'17(f) Q1'18(f) Q2'18(f) Soy oil USc/lb 35.2 33.8 31.5 33. 33.5 34. 34. 33.5 Soymeal USD/tn 311 33 315 315 315 31 315 32 Palm oil prices have remained under pressure not only from expectations of increasing production, but also from weak global demand in China and India. This is providing headwinds to CBOT Soy Oil prices. The US Dollar Index has been on the decline for the better part of 217. Since the beginning of July, the USD Index has shown a 2.4% decline, to its lowest level since June 216, which will help keep US exports more competitive but, at the same time, keeps downward pressure on commodity prices for major US export competitors. NOPA s June crush data fell to the lowest level since the drought-impacted years of 212/13 and 213/14. Year-todate, NOPA crush is just running.4% ahead of last year s pace. Using USDA data and forecasting monthly crush for the remainder of year, it appears that the USDA will need to adjust its 216/17 crush projection down by 2m to 3m bu. This implies lower oil and meal production than forecast, and tighter stocks for both products, which was already reflected in lower NOPA oil stock levels. Through May 217, US soymeal and soy oil usage seemed to lag last year s pace by 2.8% and.2%, respectively, while US soy oil exports are running +28.4% above those one year ago but US soymeal exports are 2.8% behind. US biodiesel mandate increases, indicating more soy oil demand Since the beginning of July, the USD Index has shown a 2.4% decline, to its lowest level since June 216 2,5 15 2, 1 1,5 95 1, 5 9 85 8 75 Actual Mandate Source: EPA, Rabobank 217 5/12 RaboResearch Agri Commodity Markets Research July 217
Million tonnes Thousand tonnes Palm Oil Bearish view maintained on palm oil prices Malaysian palm oil production to increase in July 217, after a significant 8.5% MOM reduction in June Global demand for palm oil to remain relatively low in the short term, due to high vegetable oil supplies, and stocks in India and China Low Indonesian 1H 217 biodiesel consumption might lead to higher-than-expected domestic palm oil stocks Worries about US soybean yield prospects could result in short-term volatility in palm oil prices Malaysian palm oil production to increase in July 217, despite an 8.5% MOM production decrease in June 217, to 1.51m tonnes. This production decrease, however, is still within expectations due to decreased harvesting and milling activities during the Eid al-fitr celebration period. We project Malaysian palm oil production to increase MOM in July 217 as normal plantation activities resume. According to Southern Palm Oil Millers Association (SPPOMA) estimates, palm oil production in Peninsular Malaysia increased by 17% MOM for the first 2 days of July 217. Historical data also shows that Malaysian palm oil production generally trends higher the month following the Eid al-fitr period. Global demand for palm oil to remain relatively weak in the short term. Despite a lower export tax, Malaysian palm oil exports still decreased by 8% MOM in June 217, to 1.38m tonnes. Looking ahead, we expect continued sluggish palm oil demand from India and China in the short term, due to the high availability of edible oil domestically. India s edible oil port stocks remained relatively high, at 738, tonnes as of the end of June 217. India s palm-oil port stocks increased by 8%, to 42, tonnes, while soft-oil port stocks decreased by 16%, to 318, tonnes. And a continued high availability of soy oil in China, following strong soybean imports and crush, continues to limit palm oil demand domestically. As of the end of June 217, Chinese domestic soy oil inventories, at 12.5m tonnes, were higher 39% YOY. Malaysian palm oil production is forecast to increase in July 217, despite MOM decrease in June 217 Palm oil price forecast is maintained as June monthly Unit Q3'16 Q4'16 Q1'17 Q2'17(f) Q3'17(f) Q4'17(f) Q1'18(f) Q2'18(f) Palm Oil MYR/tonne 2,626 2,932 3,112 2,4 2,3 2,4 2,3 2,25 Low Indonesian 1H 217 biodiesel consumption could result in higher-than-expected domestic palm oil stock levels. According to the Ministry of Energy and Mineral Resources, Indonesian domestic biodiesel consumption for the first six months of 217 only reached 1.48m kilolitres, or about 32% of the annual biodiesel consumption target of 4.6m kilolitres. The reason for the low consumption was low biodiesel blending demand in the non-public service obligation (PSO) fuel category. We expect this trend to continue in the short to medium term, as some forms of incentives will be needed to boost non-pso biodiesel demand. Worries about US soybean yield prospects could result in short-term volatility in palm oil prices. Even though palm oil fundamentals remain bearish, the current volatility in soybean complex prices will still affect the spread between CBOT Soy Oil and MDE-Bursa Palm Oil prices. The spread between the two active contracts has widened, from around USD 1/tonne in early June 217 to around USD 145/tonne in late July 217. As of June 217, China s edible oil inventories remain above previous-year levels 2.2 2. 1.8 1.6 1.4 1.2 1. 1,4 1,2 1, 8 6 4 2.8 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Soybean Oil Palm Oil 5 yr range 15/16 16/17 5yr avg End of June 216 End of June 217 Source: Bloomberg, MPOB, Rabobank 217 Source: GGN, Rabobank 217 6/12 RaboResearch Agri Commodity Markets Research July 217
USc/lb BRL/USD Sugar ICE #11 Sugar price forecast increased and still bullish ICE #11 Sugar price forecast increased Unit Q4'16 Q1'17 Q2'17(f) Q3'17(f) Q4'17(f) Q1'18(f) Q2'18(f) Q3'18(f) Sugar USc/lb 2.8 19.6 16.4 14.3 15 15 15.3 15.5 Price forecast increased to reflect bullish currency influence and the hike in gasoline taxes that favour ethanol demand in Brazil These increased price levels are more sustainable in time. But funds being massively short pose a large upside risk Summer is here: low volumes and high volatility We are increasing our ICE Sugar #11 forecast. Even though prices increased by 1% since we did our last (at the time, bullish) forecast and are now trading above it, there are still reasons to believe the market could make further gains. Much of the gains so far can be attributed to fund positioning and Brazil. Managed Money still holds a position of 112,5 lots net short, just 5,698 lots below the record net short seen last week. This position poses a high risk of profit-taking (or rushing for the exit). On the Brazilian front, the real has been quite strong as of late, currently trading at USD/BRL 3.12. However, despite all the politics at play, the implied volatility of the Brazilian real looks quite low. Furthermore, Brazil has increased taxes levied on gasoline by BRL.41/litre and on ethanol by BRL.2/litre. The relative gain in price competitiveness at the pump should favour ethanol offtake. The effects on ethanol demand may be felt more after the peak of the cane harvest, once the reduced levels of ATR usually result in ethanol gaining share of the mix. Weather in Brazil continues to be dry, favouring a good harvest pace and high amounts of ATR. A frost affected parts of Mato Grosso do Sul earlier this month, but the effect on production is thought to be on the small side, and two weeks will be needed to fully assess the damage. But apart from that isolated event, the weather so far in Brazil is nearperfect for the harvest. Even the one-week forecast looks all dry. However, there are no guarantees that the weather going forward will be as kind. With the ethanol parity set to increase due to the tax changes, the impact of rainy weather on the sugar mix could be exacerbated. Meanwhile, the weather has been excellent in Thailand and most of India, with the monsoon bringing normal levels of rainfall. However, the key producing province of Guangxi, China, has seen severe floods that caused mass evacuations. The ultimate effect on sugar (both production and storage) is still to be seen. Low volumes have resulted in high volatility. Even though the implied (i.e. expected) volatility is rather low, the volatility over June and July was significant: The October Sugar #11 contract went down 16% in June, to go up 14% from the June bottom to the current July peak. These large movements helped many orders get filled, but the average futures volume since 1 June stayed at.13m lots/day, vs..15m lots/day in the previous two years over the same summer period. It is actually the lowest volume seen in six years, which highlights little interest from producers to lock in prices at the current levels. The commercial gross-short position, at.35m lots, is only half of last year s level. Dry weather in Brazil has resulted in a good harvest pace and high levels of ATR. 3-day rainfall anomaly (mm): The Brazilian real provided significant support in the last fortnight 24 22 2 18 16 14 12.33.33.32.32.31.31.3.3.29.29.28 Sugar Oct 17 BRL/USD (RHS) Source: NOAA, Rabobank 217 7/12 RaboResearch Agri Commodity Markets Research July 217
Contracts USc/lb Coffee Neutral on arabicas, bearish on robustas Price forecast slightly increased Unit Q4'16 Q1'17 Q2'17(f) Q3'17(f) Q4'17(f) Q1'18(f) Q2'18(f) Q3'18(f) ICE Arabica USc/lb 151.2 144.6 131.8 132 137 135 135 133 ICE Robusta USD/tonne 2,1 2,169 1,936 2,6 2,6 2, 1,95 1,9 ICE Arabica prices are up 4% so far in July, helped by the Brazilian real A long dry period favoured the arabica harvest in Brazil Low warehouse stocks, but potentially higher arabica farmer stocks The market has jumped towards our forecast, and from these levels, we remain rather neutral. There is no one single fundamental reason to justify the latest jump. In the period, we have seen a 4.9% appreciation of the Brazilian real vs. the US dollar, which certainly provided some support. Furthermore, the drop in June Colombian production (-9.4% YOY) may have surprised those expecting a recovery in the harvest pace in the mitaca. Assuming no further surprises, Colombian production for this season may end up around 14m bags, a little below expectations. However, some of this drop is compensated by the surge in Honduran exports, a country that in the last three months became the largest washed-coffee exporter in the world (though July exports are expected well below June s). All eyes on the Brazilian coffee outturns. Early indications from the harvest suggest that the excellent yields (from cherry to green bean) seen last year are unlikely to be repeated. The proportion of large beans (screen 17+) is slightly below normal, but this is not a big surprise for those who were not expecting a repeat of last year s excellent conversion yields. This is so, despite the excellent dry weather in arabica regions. Another surprise was CONAB s coffee-stock survey, showing a decline of 3.6m bags in private stocks held at warehouses in the year to March 217, despite the 216/17 arabica crop being an upcycle. There are a few points worth mentioning about CONAB s stocks survey. First, it does not capture stocks at farm level, which in Brazil can be very significant. This is especially relevant this year, since farmers became timid sellers, with the declining prices seen since the November 216 peak. Secondly, a smaller-than-usual proportion of the questionnaires were answered, which does not allow like-forlike comparisons. In our honest opinion, a like-for-like comparison should be easy to make and could provide useful insights into the real level of stocks. We continue to work with a small increase in arabica stocks in the season. Managed Money continues to hold a very large net short position in the arabica market, while, at the same time, remaining long in robustas. Volatility in the arabica market is expected to be on the low side in the coming three or four weeks, given the large availability of stocks in importing countries. Barring an unlikely frost, the next volatility period will be the flowering window in Brazil, typically in September, when the weather is hardly ever perfect. But volatility in robustas is potentially very high going forward. By the end of the month, the July contract will see total tenders of about 7, tonnes of robustas. Backwardation and large deliveries are to be expected at a time of scarcity and a large global deficit. However, one keeps wondering how market dynamics will play out in the coming September and November deliveries (and potentially even January s), before the Vietnamese crop arrives to the international market. Managed Money keeps breaking record net short positions: Wet in Espírito Santo and dry in arabica areas perfect weather in Brazil. 3-day anomaly (mm): 8, 35 6, 3 4, 25 2, 2 15-2, 1-4, 5-6, Managed Money ICE Arabica Coffee Source: CFTC, Bloomberg, Rabobank 217 Source: NOAA, Rabobank 217 8/12 RaboResearch Agri Commodity Markets Research July 217
Thousand Contracts USD / tonne European + NA + Asian reported grindings 4 quarter rolling (million tonnes) Cocoa Cocoa prices jumped about USD 4/tonne since the end of June Price forecast largely unchanged and still bullish Unit Q4'16 Q1'17 Q2'17(f) Q3'17(f) Q4'17(f) Q1'18(f) Q2'18(f) Q3'18(f) ICE NY USD/tonne 2,491 2,82 1868 2, 2,4 2,5 2,5 2,1 ICE London GBP/tonne 2,46 1,678 144 1,55 1,57 1,57 1,57 1,62 ICE NY Cocoa second contract increased 2% since the end of June (to July 24) and 1% since the July bottom Grindings came in at excellent levels, supporting an annual increase of about 4% for the season Dryness followed by floods: Weather in West Africa adds a weather premium ICE NY Cocoa is likely to keep increasing towards our forecast. There were a few fundamental points that supported prices over the last few weeks. Firstly, grindings were excellent in Europe and Asia (although a little disappointing in the US). In the first three quarters of this season, reported grindings are up 4.2% YOY. This is a result of very good grinding margins due to restocking and good confectionary sales, especially of products with higher cocoa content and in emerging markets. Secondly, we believe the coming crops in West Africa, and especially in Côte d Ivoire, are not going to be as large as this season s record crop. Pod counts are said to be high, but not at record levels, and pods tend to be on the small side. After the late start to the rainy season in West Africa, a high amount of rainfall fell in the area, causing floods and preventing access to plantations. It seems to be a very temporary problem, but a lesser husbandry effort, as labour will be needed to repair flood damage, is likely. Thirdly, the output reaction of cocoaproducing countries with liberalised markets is still to be felt. In particular, the high-input, high-output systems used in Latin America could already be adapting to a low-price scenario if they believe low prices are here to stay. In the latest CFTC, Non-Commercials reached a record net short in NY. As of 18 July, Non-Commercials were holding a net short position of 55,933 lots. This is a very significant position compared with the pre-217 record net short position Non-Commercials are at a record net short, and the risk for profit-taking is high of 32,246 lots. This is a large bet for collapsing prices, but it is hard to see a further drop that can be sustained over time. Low prices may not only cause political instability in countries like Côte d Ivoire; they may also result in an exacerbated supplyside response from liberalised regions like Latin America. The correlation between sugar, cocoa, and arabica coffee has been very high lately, reaching local lows at more or less the same time in May, June, and July. With rallies in the G&O sector, a lot of currency support in coffee and sugar, and improving fundamentals for cocoa, it is unlikely we will see cocoa Non- Commercial short holding its own. Index funds have been large buyers of commodities in the last month, buying a total of 111, lots of agricultural commodities trading on US contracts. The euro has strengthen quicker than anticipated and seems to have upside momentum vs the USD. This is likely to benefit the European industry, which, with growing sales, could see its coverage being extended as the euro strengthens. In NY, the Commercial gross long is still 32, lots below the maximum, whereas in London Merchants/Processors are 66,82 lots below the maximum gross long position: Lots of room for further coverage in the coming few weeks in case the euro keeps strengthening. With low prices, demand is reacting. Reported grindings in the EU, NA, and parts of SE Asia making new highs 8 6 4 Non-Commercial Net Length vs. ICE NY Cocoa 34 3 2.55 2.5 2.45 2-2 -4 26 22 2.4 2.35 2.3-6 -8 18 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 2.25 Non-Commercial Net Length ICE Cocoa (RHS) Source: CFTC, Rabobank 217 Source: CocoaAsia, NCA, ECA, Rabobank 217 9/12 RaboResearch Agri Commodity Markets Research July 217
Percentage of total acreage Million bales Cotton Weather risk keeps near-term contracts supported, followed by price pressure as 217/18 crops enter harvest Cotton price forecast revised marginally lower in near term Unit Q4'16 Q1'17 Q2'17 Q3'17(f) Q4'17(f) Q1'18(f) Q2'18(f) Q3'18(f) Cotton USc/lb 7 75 79 7 68 68 66 66 Weather-focused trade as US crop enters critical development period; crop conditions and abandonment ratings remain key Support to remain until higher confidence in US crop prospects low-case scenario of USc 63/lb Rumoured extension to Chinese 217 auctions brings rate of destocking into question The ICE #2 consolidates at USc 68/lb, with further support on the horizon. After June s significant sell-off, cotton is now trading in the USc 66/lb to USc 69/lb range a far cry from May s +USc 85/lb peaks. For the near term, this trade is predominately weather-focused, with much attention on the vast size of the US new crop, plus additional supplies out of India and Pakistan. While USc 68/lb is a realistic price in light of increasing 217/18 global export availability, the scope for a further price premium remains as we enter the Northern Hemisphere s most critical phase as the crop sets bolls. Ongoing crop conditions will therefore be key for price discovery, with ratings so far appearing 6% good/excellent nationally vs. 54% last year. A deteriorating Texas soil moisture profile, particularly in the panhandle, is of concern and should keep prices supported until relieved perhaps within the 6-1-day period, according to the latest from NOAA. Assuming a weather risk remains, Rabobank forecasts the ICE #2 to average USc 7/lb through Q3 217, falling to USc 66/lb in 12 months. However, improving US conditions, nonthreatening weather, and higher confidence in US output could see prices slump to our low-case forecast of USc 63/lb. For the US, the big question surrounds US abandonment revised from 6.9% to 7.3% nationally by the USDA in July. However, with isolated drought incidents and hail storms in Western Texas, we see scope for this figure to grow even further (even at 7.3%, abandonment sits at relatively low levels historically). Assuming an 81lb/acre yield and 12m planted acres, every 1% increase in national abandonment drives an approximate 2,-bale decline in US output. A rumoured extension to the 217 Chinese cotton reserve auction is circulating, with one additional month of auctions being conversed. This extra period could bring additional sales of up to 1.8m bales, destocking domestic reserves at a slightly higher pace. While this has few short-term impacts on global prices albeit a temporary softening in Chinese import demand the move raises questions as to when the Chinese reserve policy will end, which potentially could now be soonerthan-expected. With China destocking some 1m bales of cotton each year, before reaching a comfortable 2m bales by 219/2, Rabobank expects the consequences of a subsequent policy shift to be dramatic for the international cotton market. US conditions are exceptional so far, rated 55% GD/EX. However, deterioration could be in store if drought persists Chinese destocking is forecast to wrap up by 219/2, although alleged auction extensions may bring this forward 7% 65% 6% 55% 5% 12 1 8 6 45% 4% 35% 3% 4 2 5 Yr. Range 5 Yr. Average 216 % Good/Excellent 217 % Good/Excellent Condition China Ending Stocks World (exc. China) Ending Stocks Source: USDA, Rabobank 217 Source: USDA, Rabobank 217 1/12 RaboResearch Agri Commodity Markets Research July 217 China 2m Bale Target
Imprint RaboResearch Food & Agribusiness far.rabobank.com Agri Commodity Markets Research Stefan Vogel, Head of ACMR stefan.vogel@rabobank.com, +44 2 7664 9523 Carlos Mera, Senior Commodity Analyst carlos.mera@rabobank.com, +44 2 7664 9512 Graydon Chong, Senior Commodity Analyst graydon.chong@rabobank.com, +44 2 7664 9579 Charles Clack, Commodity Analyst charles.clack@rabobank.com, +44 2 7664 9756 Contributing analysts: Andy Duff São Paulo, Brazil andy.duff@rabobank.com Stephen Nicholson St Louis, USA stephen.nicholson@raboag.com Oscar Tjakra Singapore oscar.tjakra@rabobank.com Rabobank Markets Corporate Risk & Treasury Management Contacts GLOBAL HEAD Martijn Sorber +31 3 21 69447 martijn.sorber@rabobank.com ASIA Koon Koh Tan +65 623 6988 koonkoh.tan@rabobank.com AUSTRALIA Terry Allom +61 2 8115 313 terry.allom@rabobank.com NETHERLANDS Arjan Veerhoek +31 3 216 94 arjan.veerhoek@rabobank.com EUROPE David Kane +44 (2) 7664 9744 david.kane@rabobank.com NORTH AMERICA Neil Williamson +1 (212) 886966 neil.williamson@rabobank.com SOUTH AMERICA Ricardo Rosa +55 11 553-715 ricardo.rosa@rabobank.com 11/12 RaboResearch Agri Commodity Markets Research July 217
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