Section 1 Introduction | 1 1 Introduction Rabobank sees agri commodity prices down, the levels seen in 2008/09. Elevated price but not out, in 2012. Improved fundamental levels must persist in order to encourage balances and uncertain economic conditions farmers to continue expanding production are expected to keep prices below the 2011 to keep pace with demand growth and highs. However, risks to our price forecasts allowing global inventories to rebuild. are skewed upwards as reliance upon Agri commodity demand should remain nontraditional producers pose an increasing robust in 2012 as consumptive growth in threat, and inventories remain near emerging-market economies continues to historical lows. drive the agri complex. Our analysis suggests We believe the long-term bull run in agri that supply side risks, from both weather commodities remains, but expect prices and politics, have increased again for 2012 across the complex to ease from their record and there remains considerable risk of an highs, continuing their downward trajectory inflection in both price and volatility levels in place since mid-2011. Absent further macro amid adverse production conditions across deterioration, prices are unlikely to plunge to the agri complex.Figure 1.1: Rabobank’s 2012 agri commodity price forecasts Q1’11 Q2’11 Q3’11 Q4’11f Spot* Q1’12f Q2’12f Q3’12f Q4’12fWheat (CBOT) USc/bu 788 748 688 610 579 595 630 615 595Wheat (Matif) EUR/tonne 253 234 199 170 179 162 175 172 166Corn USc/bu 674 732 696 620 585 610 645 630 610Soybeans USc/bu 1,381 1,363 1,358 1,165 1,122 1,178 1,226 1,260 1,251Soy oil USc/lb 57.0 57.3 55.8 49.4 49.3 48.7 50.2 49.1 47.5Soymeal USD/ton 260 240 230 300 282 310 290 330 335Palm oil MYR/tonne 3,681 3,365 3,100 3,000 3,171 2,800 2,900 3,000 3,100Sugar USc/lb 30.6 24.4 28.7 24.5 23.1 23.5 23.0 22.0 22.0Coffee USc/lb 258 271 257 230 232 220 200 180 170Cocoa USD/tonne 3,322 3,042 2,969 2,400 2,246 2,350 2,450 2,350 2,300Cotton USc/lb 182 168 108 95 91 85 85 80 80Source: Rabobank, Bloomberg, 2011
2 | Rabobank Outlook 2012—Down, But Not Out We see lower average prices for all agri 1. Economic slowdown commodities covered in our 2012 forecast. 2. Speculators and the US dollar However, we see upside, from depressed spot prices, for corn, wheat, soybeans, sugar and 3. Policy risks cocoa as fundamentals reassert themselves 4. Capacity constraints and market participants continue to come to grips with the European debt crisis. We see Given the heightened uncertainty in the downside to cotton and palm oil prices in the macro environment, we have decided to short term. In the livestock sector we expect frame our price and fundamental forecasts higher live cattle prices and slightly lower lean in base, low and high-case scenarios to hogs prices in 2012. give guidance over the level of confidence around our economic forecasts and macro Our outlook is centred on four key themes level assumptions. for the agri commodity markets in 2012 which we expect to determine commodity prices. Aside from the inherent weather uncertainties in agriculture, we identify these variables as critical for the agri complex over the next 12 months. Rabobank’s 12-month outlook for prices from current levels Soymeal prices are likely to rebound in 2012 after SOYMEAL underperformance relative to soy oil and soybeans in 2011. Soybean prices are likely to be lower YOY in 2012, but SOYBEANS remain historically elevated, rationing demand, as global production declines. US live cattle prices are expected to fall in Q1 2012 from their LIVE CATTLE November 2011 highs as a record number of cattle on feed outstrips demand in the near term. Although lower than 2011 averages, we expect corn prices to rally CORN from current spot prices into Q2 2012 before easing in Q4 2012 on record production. Abundant supply of cocoa beans and better expectations for the COCOA 2011/12 crop are expected to lead prices lower in 2012. The demand profile for soy oil is relatively recession-resistant, SOY OIL which will likely see prices remain elevated in order to slow demand growth. Neutral price direction is expected over the next 12 months as the WHEAT second largest world wheat crop on record softens the fundamental outlook, but coarse grains provide support. Despite our forecast for record large palm oil production in 2012, we PALM OIL expect the low stock levels of total vegetable oils to limit palm oil’s price downside. Momentum in the US lean hog market is expected to wane in 2012 LEAN HOGS as producers increase farrowing to meet demand and Chinese import growth slows. We forecast lower international sugar prices in 2012 as the market SUGAR shifts into a surplus for the first time in three seasons. We expect the global cotton industry to be under pressure and COTTON prices to fall due to the largest global cotton crop on record. Prices are forecast to fall in 2012 due to the large harvests expected COFFEE in Brazil and Vietnam, but diminished stocks will keep risks high.
Section 1 Introduction | 3A quick look in the rear-view mirror: A review of our forecasts for 2011One of the most common questions we get when talking to clients is “how accurate were your forecasts last year?” This is avery valid question, so before we launch into our 2012 agri markets outlook, we would like to share a quick self-evaluationof our performance in 2011—the good, the bad and the ugly.Our 2011 agri markets outlook report, Agri Bull Market Clouded by Macro Uncertainty, released in December 2010,highlighted seven key themes for the year ahead. 1. Tightening inventory levels 2. Supply limitations 3. Demand growth from emerging markets 4. China commodity short 5. Heightened political risk amid tightening food supplies 6. Fundamentals only part of the story 7. Sustained heightened volatilityThese were the issues we saw as the most important variables likely to influence agri commodity markets in 2011, inaddition to constant supply and demand drivers, such as weather vagaries. Overall, these issues all showed varying degreesof relevance in 2011, and many of them will remain relevant in 2012, assuming the absence of major weather events.As last year’s title suggested, from a fundamental viewpoint we held a bullish outlook for the agri complex; our priceforecasts showed an expectation of higher prices for all but one market in 2011. Our top picks for 2011 were corn, soybeansand coffee, and as it turned out, two out of three ranked at the top of the list in terms of year-on-year price increases, withcoffee the top performer, followed by cotton and corn (see Figure 1.2). Our price forecasts for most commodities weregenerally accurate in terms of direction, with only cocoa moving against our forecast due to the outlier event of theelection crisis in Ivory Coast, which we did highlight as a risk, and which created an unexpected rally for prices. Interestingly,as the situation has normalised and supply chains have restocked, prices have tracked in line with our forecast curve, albeitat an elevated level (see Figure 1.3).The other major event of 2011 was the hottest July the US Midwest has seen in over 50 years, which reshaped the supplyside of the balance sheet for the grains complex. This extreme weather event resulted in both a production forecastdowngrade of over 10% and significantly higher prices. Since April, our price forecasts have reflected a much tighterbalance sheet and have quite accurately indicated Q2 as a turning point with quarter-on-quarter declines forecast for Q3and Q4 (see Figure 1.4). Figure 1.2: Rabobank 2011 forecasts (December 2010) vs. actual, 2011 Rabobank 2011 forecasts (December 2010) Actual Q1’11 Q2’11 Q3’11 Q4’11 Q1’11 Q2’11 Q3’11 Q4’11 Wheat USc/bu 700 680 675 675 788 748 688 610 Corn USc/bu 600 580 550 540 674 732 696 620 Soybeans USc/bu 1,300 1,275 1,200 1,185 1,381 1,363 1,358 1,165 Soy oil USc/lb 53 54 52 52 57 57 56 49 Soymeal USD/ton 355 350 345 340 367 354 353 300 Palm oil MYR/tonne 3,650 3,200 2,900 2,750 3,681 3,365 3,100 3,000 Sugar USc/lb 28 26 24 22 31 24 29 25 Coffee USc/lb 195 195 190 185 258 271 257 230 Cocoa USD/tonne 2,550 2,450 2,350 2,300 3,322 3,042 2,969 2,400 Cotton USc/lb 135 115 90 85 182 168 108 95 Source: Rabobank, Bloomberg, 2011
4 | Rabobank Outlook 2012—Down, But Not Out Figure 1.3: ICE NY Cocoa; Rabobank forecast vs. actual prices, Figure 1.4: CBOT Corn; Rabobank forecast vs. actual prices, 2010-11 2010-11 3,400 800 750 3,200 700 3,000 650 600 USD/tonne USc/bu 2,800 550 500 2,600 450 2,400 400 350 2,200 300 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q1’10 Q2’10 Q3’10 Q4’10 Q1’11 Q2’11 Q3’11 Q4’11 Actual Dec 2010 forecast Actual Dec 2010 forecast Apr 2011 forecast Source: Rabobank, Bloomberg, 2011 Source: Rabobank, Bloomberg, 2011 Our most accurate price forecasts across the year were for oilseeds (soybeans, soymeal, soy oil and palm oil) and wheat, where negative supply-side issues were less of a factor (see Figure 1.5). Our least accurate forecasts were two of the ‘COs’, cotton and coffee, where despite the direction of the forecast being correct, the magnitude of the price increases was well above our expectations. Figure 1.5: Rabobank quarterly average price forecasts vs. actual price moves in 2011 70 60 50 40 percent 30 20 10 0 -10 -20 Wheat Corn Soybeans Soy oil Soymeal Palm oil Sugar Coffee Cocoa Cotton Rabobank December 2010 forecast Actual Source: Rabobank, Bloomberg, 2011 Our commodity price forecasts are provided as a guide to demonstrate our expectations for price direction throughout the year—regularly updated in our Agri Commodity Markets Research Monthly reports. In view of the level of volatility in the macroeconomy and the general uncertainty in 2011, our forecasts from a year ago have turned out to be reasonably accurate. Our bias for higher prices in the complex proved correct and our top picks—corn, soybeans and coffee— performed better than expected. The seven key themes we identified all played a role in price movements during 2011, most notably supply limitations and heightened political risk due to their impact on corn and cocoa prices. As these risks intensified in Q1 2011, our price forecasts were more accurately revised higher while maintaining a downward bias towards the end of 2011. Although our forecasts for 2H 2011 appeared bearish against market estimates and the futures forward curve, our expectations for more balanced fundamentals and an easing in prices have largely played out, and we expect this to continue into 2012.
Section 2 Key themes for agri markets in 2012 | 52 Key themes for agri markets in 2012 Economic slowdown Biggest losers Slowing global economic growth in 2012 We anticipate an increased supply of many will only have a modest impact on agri agri commodities to result in lower prices in commodity prices as resilient emerging- 2012, but we do not expect a price collapse market demand offsets anaemic growth due to supportive demand and only a modest expectations in the developed world. build-up of inventories. However, as supply is We expect commodities that have a large forecast to be historically tight for many agri speculator long position and those with commodities, we anticipate supply-side a high correlation to global growth, concerns to remain a major supportive factor including livestock and cotton, to be the for most markets, especially coffee and corn. most vulnerable to slowing global growth. On the demand side of the ledger, we expect Commodities with a stable demand base lower international prices to encourage buying and supportive fundamentals, such as corn and stock-building. In our view, demand loss in and coffee, are expected to be the least the developed world will be inconsequential exposed to a contraction in economic growth. even with an economic downturn, as lower prices encourage commercial buying. Rabobank sees continued macro uncertainty Demand growth in emerging markets is with stagnant growth prospects in the EU expected to remain robust and a driver and the US, and resilient but weaker of prices in the agri complex. expansion in the emerging-market economies in 2012 (see Figure 2.1). We view We see the cotton and livestock markets the prospect of a return to recession as a as most vulnerable to economic contraction considerable risk for both the US and the EU, and stagnant growth. Total meat and fish but we expect any contraction to be shallow. consumption in the US peaked in 2004 and As industry and governments are aware of has been declining ever since due to altered the recession risk and are positioned diets and reduced incomes. This trend is being defensively, we expect a downturn to be countered by increased meat and fish small. Our emerging-market growth forecast consumption in emerging markets, which is projects a level of growth similar to what was more than enough to offset the reduction in seen in the first half of the decade, and while US consumption. In our view, the higher the emerging markets are not likely to be able valued livestock markets will be exposed to to decouple from the developed world, we demand loss if there are further reductions to see domestic consumption prospects and household incomes in the US. The high share proactive governments as reasons these of speculators in the livestock futures markets economies will avoid being dragged into a is also viewed as a threat since a risk-off sell- recession by the developed world economies. off could pressure the markets. The speculator net long in the US livestock markets of
6 | Rabobank Outlook 2012—Down, But Not Out 15 November represented 22% of total open US and EU to stumble along interest, up from 9% in early June, and up Rabobank’s macro economists are forecasting from the 2011 average of 18%. Given the economic growth in the US to be slightly fundamentals, there is a compelling reason lower in 2012 as political deadlock and for livestock values to be elevated currently, waning consumer confidence result in but we see the market as particularly economic stagnation. Gross domestic product vulnerable to macro risks. Since cotton is a (GDP) in the US is forecast to grow at 1.5% in consumer product, the cotton market is also 2012, down from 1.7% in 2011 and down highly susceptible to recession, and given the from 3.0% in 2010. In the EU the outlook is forecast fundamentals in the new season, we bleaker; we expect debt concerns and stalling see heightened downside risk. Cotton prices member economies to bring about only slim on the NY market have fallen during the last positive growth. EU GDP is expected to slow seven US recessions going back to 1970 to 0.4% in 2012 from the 1.6% expected in (see Figure 2.2). Cotton prices are forecast 2011 and the 1.8% expected in 2010. Our lower in 2012 due to better supply and modest growth forecast assumes the EU will lacklustre demand, but weakening economies have found a lasting resolution to the debt could extenuate the downside correction. crisis. Elevated risks remain skewed to the downside for both regions as unemployment Differing underlying fundamentals as well remains high, market sentiment is weak and as diverse income elasticities of demand social unrest is rising. will result in varied price reactions among commodities during recessionary events. We We forecast limited demand loss for agri expect the main economies of the world to commodities in both the EU and the US remain out of recession in 2012, but as risks of even in the face of a double-dip recession. a double-dip recession in both the US and the Although real incomes are declining in the EU are high, we have reviewed the potential US and unemployment is high in both response in the agri complex. In general, regions, food remains a small part of recessions do not impact agri commodities discretionary incomes and the consumption uniformly. In fact, supply dynamics are much of most agri commodities is anticipated more important for price movements, and to be stable. High-value products such as this is expected to be the case in the event of livestock or consumer-oriented cotton are a recession in 2012. Recessions have little the most exposed to economic risk and effect on the demand side in the developed could be threatened depending on the world and economic contractions do not scale of a downturn. generally impact supply, which is much more Emerging markets to drive demand dependent on long-term prices and weather. growth The downside risk for commodities is much Rabobank anticipates emerging-market larger if a sizeable slowdown in emerging growth to ease in 2012 but demand growth markets occurs, as this is the source for much in agri commodities to remain strong. We of the expected expansion in consumption. foresee economic growth rates in the Figure 2.1: Rabobank GDP quarterly growth estimates and Figure 2.2: Performance of the S&P GSCI Agriculture Index over forecasts, Q1 2000-Q3 2012 the past seven US recessions, Dec 1969-2009 15 600 10 500 400 percent 5 300 0 200 -5 100 0 -10 Oct-11 Apr-01 Apr-73 Oct-76 Apr-80 Oct-83 Apr-87 Oct-90 Apr-94 Oct-97 Oct-04 Apr-08 Dec-69 00Q1 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 00Q3 01Q3 02Q3 03Q3 04Q3 05Q3 06Q3 07Q3 08Q3 09Q3 10Q3 11Q3e 12Q3f 12Q1f e=estimate; f=forecast US Euro area China Brazil S&P GSCI Agriculture Index Recession Source: IMF, Rabobank, 2011 Source: Bloomberg, Rabobank, NBER, 2011
Section 2 Key themes for agri markets in 2012 | 7 emerging markets to hover near the bottom is significant as household incomes increase of levels seen just before the financial crisis and demand changes from staple grains to of 2008/09, with emerging-market growth more protein from meat. The higher share forecast at 6.5% for 2012, down modestly of income devoted to food in China is also a from 6.9% in 2011 and 7.8% in 2010, but threat as higher prices can result in significant modestly higher compared with the 2000- demand destruction. The ongoing 2005 average of 6.0%. In our view, the demographic and agricultural conversion emerging-market economies will not be from a rural population and fragmented able to decouple from a slowdown in the production to an urban population and developed world, but increasing domestic intensive food production will continue in demand will play a larger role in growth and 2012. Domestic inflation of food prices is will be supportive for the agri complex. For forecast to ease in 2012 as international agri Brazil, we expect GDP growth in 2012 of 3.6%, commodity prices fall. This is likely to support flat from 3.6% in 2011, and we continue to further increases in demand in China. In our see global demand for agri commodities view, elevated agri commodity prices resulted as a driving force in the Brazilian economy. in Chinese government destocking in 2011. The changing diets and increasing urban The need to restock inventories will be a population in the emerging markets are supportive impact for prices and is expected expected to remain the drivers for the agri to occur despite the modest forecast complex. Demand for oilseeds in emerging downturn in economic growth. markets has grown 110% since 1999 while in Doomsday outcome the developed world the increase has been Rabobank views the likelihood of a recession 12% (see Figure 2.3). Increasing consumption or major contraction of the Chinese economy of agri commodities in emerging markets has in 2012 as very slim. However, a contraction played a major role in tightening balance would have major consequences for both the sheets despite large global harvests in the global economy and the agri commodity past two seasons, and we expect this trend complex. Given the Chinese government’s to continue in 2012. readiness to spend vast reserves to A slowdown in the key Chinese economy in support the economy and to acquire agri 2012 is not expected to impact the growth commodities to alleviate high domestic prices in agri commodity demand as inventories and avert social unrest, we would expect are low for many commodities, inflation the agri complex to remain supported even is elevated and the government has the in the case of slower-than-anticipated means and will to secure supplies on the economic growth. A hard landing for China international market to temper and even would have profound negative impacts on control domestic food prices (see Figure 2.4). the agri complex, but any contraction event Food costs represent a higher share of would likely only have short-term impacts household income in China relative to the on the market. US or the EU. This is an opportunity since the potential to increase agri commodity demandFigure 2.3: Oilseed consumption EU and US vs. BRICs, Figure 2.4: Global GDP and agri commodity demand indexed,1999/00-2011/12f Dec 1986-Dec 2010 160 300 500 150 450 140 250 400 130 350million tonnes Dec 1986 = 100 Dec 1986 = 100 120 200 300 110 250 100 150 200 90 150 80 100 100 70 50 60 50 0 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12f Corn demand Soybeans demand US and EU BRICs Sugar demand Global GDP (RHS)Source: Rabobank, USDA, 2011 Source: USDA, Rabobank, IMF, 2011
8 | Rabobank Outlook 2012—Down, But Not Out Economic outlook Recession or slowing economic growth will be a threat to the agri commodity markets in 2012, but in our view the expected resilient demand growth from many agri commodity markets in emerging economies will help mitigate the impacts from any economic downturns. We anticipate lower-than-average stock levels of many agri commodities to support prices; while harvests are expected to be large, encouraged by the high prices, the supply response is still catching up to demand. In our view, a recession, if it does occur, would be expected to be shallow and not to impact agri commodity demand. However, cotton is viewed as more susceptible to a downturn, and livestock consumption can also be impacted by recession, but we see emerging-market demand expansion as more than sufficient to make up for demand losses in the developed world. We anticipate lower prices in 2012 as a function of better supply; this will support demand despite the heightened global macro uncertainty.
Section 2 Key themes for agri markets in 2012 | 9Speculators and the US dollar likely against most other commodities inWeak fundamentals for the US dollar should 2012. Loose monetary policy conditions inproduce a period of further devaluation the US following two rounds of quantitativeversus most other currencies throughout easing in 2008 and 2010, ongoing record2012, providing upside support for most low interest rates, high unemployment andagri markets. But as we have seen in 2011, anaemic growth expectations for the USfundamentals do not always matter. economy are expected to see most otherRabobank’s base-case macro and foreign currencies outperform the US dollar overexchange forecasts suggest that a weaker the next 12 months. However, we do expectUS dollar environment will reappear again to see some recovery of the US dollar againstin 2012. While global financial market and major commodity currencies in 2012, whichmacroeconomic uncertainty remain a we believe are overvalued.significant risk to our forecasts, particularly These weaker fundamentals for the US dollarif the trend of widespread risk aversion look set to reassert themselves in 2012, andcontinues from 2011 into 2012, a generally while the US Federal Open Market Committeeweaker US dollar should be a supportive (FOMC) has not indicated they will implementfactor for the agri complex in the year ahead. another round of quantitative easing stimulusUnsurprisingly, we do not expect the (QE3) at this stage; they have not ruled itweakness of the US dollar to be uniform out either, and we expect this to remain inin magnitude or even direction, with the play throughout 2012. Even without QE3,potential for short-term upside against US Federal Reserve policy measures lookthe euro afflicted by political paralysis and set to remain loose, with US Federal Reservedisunity in the member bloc. However, against Chairman Bernanke explicitly stating thatother currencies we see further downside for the federal funds rate was set to remain atthe US dollar from current levels, improving an “exceptionally low level at least throughboth the purchasing power of emerging- mid-2013” given conditional economic ,market importers and the competitiveness conditions. Our forecasts do not see a caseof US agricultural exporters against many for strong enough growth in 2012 to moveof their key competitors (see Figure 2.5). We FOMC policy from current levels. A risk towould expect most prices within the agri this view is the possibility that the Europeancomplex to appreciate in a weaker US dollar Central Bank could become the lender ofenvironment. We highlight corn, wheat, last resort which would have a longer termsoybeans and lean hogs as the biggest drag on the euro, balancing the poor USwinners in the complex as the US export dollar fundamentals.market improves on a weaker dollar. Recovery from the current challenges appearsOnce the dust settles on the EU debt crisis, likely to be protracted and hence we seewe expect focus to return to weaker loose monetary policy and a weak US dollarfundamentals for the US dollar, with downside as capable of buttressing the US economy. Figure 2.5: Rabobank FX forecasts, 2012 Q1’12 Q2’12 Q3’12 Q4’12 EUR/USD 1.33 1.39 1.45 1.48 USD/JPY 78.00 79.00 82.00 83.00 GBP/USD 1.56 1.62 1.69 1.74 USD/CHF 0.93 0.90 0.90 0.91 AUD/USD 1.00 0.98 0.97 0.95 NZD/USD 0.76 0.75 0.74 0.73 USD/CAD 1.00 0.99 0.98 0.98 Source: Rabobank, 2011
10 | Rabobank Outlook 2012—Down, But Not Out ‘Flight to safety’ has become a common complex and key macro indicators jumping catch cry in 2011 and, given the ongoing sharply to reflect the focus of the EU debt macroeconomic uncertainty, risk aversion crisis (see Figure 2.7). As this continues to may well continue to be a key theme in 2012. play out, we expect uncertainty to remain This macro uncertainty—primarily the result elevated, resulting in a continuation of high of the EU debt crisis, but also influenced by correlation between most asset classes bipartisan politics in the US and mounting continuing into 1H 2012. worries of a Chinese economic slowdown— Speculators abandon ags has created a risk-on/risk-off trading Speculative money flows will largely be environment in all markets over the past determined by the macro environment in 12 months. Risk-off has meant a withdrawal 2012, with a clear resolution in the euro area of funds from emerging market assets and needed to restore confidence levels amongst currencies, as they are perceived to be higher investors. Over the past 12 months, we have in risk than the US dollar, despite growth seen diverging dynamics: the first half of the prospects in these markets remaining much year saw surging agri markets attracting stronger than in most developed economies. additional investor inflows as an inflationary For agricultural prices, this has compounded hedge amid rising world food prices, while a price volatility as speculators have not only flight to safety resulted in significant net shifted into and out of the underlying agri outflows of investor capital from agri markets markets, but also between the commodity in the second half of the year. Looking ahead, currencies and the US dollar (see Figure 2.6). a sudden and complete return of investor Looking ahead to 2012, the challenge money into the agri complex appears becomes one of macro uncertainty and diminished as the macro uncertainty is likely whether we continue to see periods of to remain for some time to come. We also extreme risk aversion continuing in 2012. expect there will be less of a constructive Correlation spike fundamental story in agri markets in 2012 as The extreme macro uncertainty has resulted fundamentals appear more in balance than in in all asset classes becoming even more recent seasons. intertwined over the past 12 months. Broader Winners and losers themes such as liquidity, political risk, financial Based on Rabobank’s forecast of a weaker US stability, austerity measures and social unrest dollar against most developed and emerging- have all resulted in agri markets, currencies, market currencies over the next 12 months, equities and other asset classes becoming commodities produced and exported from highly correlated for most of 2H 2011. Recent the US are the most likely to benefit. Further developments have escalated fears of devaluation of the US dollar in 2012 will add contagion. Globally, there are considerable support to what we expect to be resilient concerns as to whether individual commodity emerging-market demand for agricultural or asset class fundamentals have become commodities (see Figure 2.8). Recent years mostly irrelevant as focus has shifted from risk have seen considerable decoupling of appetite to risk aversion. In September 2011, emerging-market currencies from the US we saw the correlations between the agri Figure 2.6: Managed money net long positions in agri Figure 2.7: Correlation between the agri complex and key macro commodities vs. S&P GSCI Agriculture Index, Jan 2007-Nov 2011 indicators, Jan 2007-Sep 2011 600 1,400 0.7 daily price correlation to MSCI World Index 550 1,200 0.6 S&P GSCI Agriculture Index 500 1,000 0.5 thousand contracts 450 800 0.4 400 600 0.3 350 400 0.2 300 200 0.1 250 0 0 Jan-11 May-11 Sep-11 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 2007 2008 2009 2010 2011 Sep-2011 S&P GSCI Agriculture Index CBOT Corn NY ICE Sugar S&P GSCI Agriculture Index Managed money net long (RHS) CBOT Wheat Average (Rabobank coverage) Source: CFTC, Bloomberg, 2011 Source: Rabobank, Bloomberg, 2011
Section 2 Key themes for agri markets in 2012 | 11dollar, which enables additional purchasingpower in a weaker US dollar environment.In the instance of China, one of the keydestinations for US agricultural exports, looserregulatory control has seen the Chineserenminbi gain 7%-8% versus the US dollarsince mid-2010 and over 23% since 2005. Weare forecasting a near-record 4 million tonnesof corn to be exported to China in the2011/12 season and, given domestic supplyconcerns and inflationary pressure fromhistorically high grain prices, a weaker USdollar versus the renminbi may encouragefurther imports to help meet burgeoningdomestic demand. Similarly, we also seeadditional demand support from a weakerUS dollar for soybeans, pork and beef.A weaker US dollar can also alter trade flowsby providing improved competitiveness forUS agricultural exports on the world market.Commodities we see as most likely to benefitfrom this are the key US grains and oilseedssuch as corn, soybeans and, to a lesser degree,wheat. US beef and pork exports will alsolikely benefit from a devaluation of the USdollar, although market access tends to be amore potent determining factor for thesemarkets. While the US dollar is forecast toweaken against most currencies, we areforecasting it to strengthen against theAustralian and New Zealand dollars and tohold fairly stable relative to the Canadiandollar. Although these commodity currenciesare generally defined by their economies’reliance on metal and energy exports,agricultural exports from these countries cancompete with US exports for global marketshare. For example, wheat exports fromAustralia will likely benefit from a weakeningAustralian dollar relative to the US dollar. Figure 2.8: USD index and S&P GSCI Agriculture Index, 1993-2011 120 550 110 450 100 350 90 250 80 70 150 2001 2011 1993 1995 1997 1999 2003 2005 2007 2009 USD index S&P GSCI Agriculture Index Source: Rabobank, Bloomberg, 2011
12 | Rabobank Outlook 2012—Down, But Not Out Policy risks world will see pressure to cut subsidies to Global agricultural markets are being farmers who are operating in an environment increasingly politicised, impacting global of near-record agri market prices. With this agricultural trade, contributing to heightened in mind, forecasting the political risks to the supply uncertainty and lifting price volatility. world’s food basket, and the prices at which Geopolitical factors, such as the 2010/11 it is available, will become a more complex Black Sea region grain export bans, and a task in 2012. return of civil war to the Ivory Coast, had We see corn and cocoa as especially significant impacts on agricultural markets vulnerable to political risks in 2012, although (see Figure 2.9). We believe that 2012 will fundamentals are improving for both as once again see political intervention as an producers responded to higher prices by important determiner of winners and losers increasing production in 2011. The risk in the agri complex. spectrum for the agri complex is skewed It is important to note the difference between further upward in 2012 as political risks pose the ongoing political battles in the arena of larger threats to global trade balances. general fiscal policy and political changes Fuelling policy speculation directly applicable to the agri complex. The 2012 US Presidential Elections represent Our particular focus is on the potential the largest potential stumbling point for US for protectionist responses to exaggerate agricultural support mechanisms in several supply shocks. years. Despite market rhetoric, the US has the Protectionist responses to weather anomalies, fourth-lowest producer support estimate as which are likely to increase as the threat of a percentage of GDP in the OECD, indicating climate change looms larger, are on the rise. comparatively low net transfers to the agri Market sensitivity to rising food inflation in complex. However, as rounds of budgetary the developing world is increasing. Upcoming negotiations should bring about substantial presidential elections in the US pose a risk reductions in US agricultural subsidies from to renewable fuel subsidies. Perhaps most 2012 onwards, support is likely to decrease important of all, the over-indebted developed even further. Figure 2.9: Policy risk hotspots in 2012 Black Sea region export bans Chinese strategic reserves Ethanol policy review and self-sufficiency Sugar export quotas to support domestic prices Civil wars and cocoa-OPEC Export tariffs and industrial action Source: Rabobank, 2011
Section 2 Key themes for agri markets in 2012 | 13 The biggest unknown, and a potential risk Because the blender’s credit is unlikely to for prices for the agri complex in 2012, is be extended and the RFS2 is unlikely to be the US corn ethanol/biodiesel policy. Ethanol repealed, we believe that policy risks only demand for corn, which in 2010/11 eclipsed pose marginal risk to corn ethanol production domestic feed consumption for the first time, in 2012, with spot- and implied future margin is currently supported through three major analysis showing that distilling and blending mechanisms: ethanol in the US is currently a profitable endeavour (see Figure 2.10). This runs against • Tax credit for blending ethanol with common perception, which still suggests that gasoline, known as the blender’s credit is, ethanol blending would suffer immensely currently USD 0.45/gallon. This is expected without the blender’s credit. This being said, to expire at the end of 2011. there remains announcement risk, which • The expanded Renewable Fuels Standard could drive down ethanol production and (RFS2) mandates levels of renewable fuel prices in the short term as the agri complex blending, but caps the level of corn starch adjusts to a changed operating environment. ethanol. Production above this level does Global oil policy has a strong impact on the not contribute towards the total mandate. agri commodities complex, both through For 2012, the mandate is 15.2 billion demand, as it affects global economic growth, gallons, of which no more than 13.2 billion and more directly through driving half of the gallons, approximately equivalent to ethanol profitability equation. Following 4.9 billion bushels of corn, can come from stimulus programmes introduced by Saudi corn starch ethanol. Arabia during the Arab spring of 2011, it is • A USD 0.54/gallon import tariff to support likely that OPEC will calibrate production the domestic industry. As imports are not through the 2012 calendar year to maintain currently economical, we do not consider prices of USD 100/barrel or higher to try to the import tariff a crucial piece of the maintain a moderate fiscal surplus in the ethanol puzzle in the current environment. coming years. All else remaining equal, at This is expected to expire at the end these levels, we would need to see corn prices of 2011. at USD 6.80/bushel before US ethanol distillery profits turn negative on a spot basis The current environment sees an increased and capacity is taken off-line. risk of a political turnaround, and subsequent repeal, of supportive policies in the US The re-emergence of protectionism compared to recent years. However, there The increasing reliance on nontraditional have been remarkably few cases of federal exporters to meet the world’s agricultural laws being repealed in US history and this demand leaves a number of markets in the gives us little reason to expect that the RFS2 agri commodity complex more vulnerable mandate will be wound back, reformed or to supply-side shocks through policy repealed in 2012, as congressional vested intervention. Compounding this price risk is interests are likely to prove more powerful the fact that we continue to see historically than the anti-deficit lobby. low inventory levels for a number ofFigure 2.10: US ethanol profitability estimates, Jan 2008-Jan 2012f Figure 2.11: Commodity risk profiles, 1980/81-2011/12f 1.0 2.0 1.8 Trade-weighted risk assessment 1.6 0.5 1.4USD/gallon 1.2 0.0 1.0 0.8 Refinery purchasing of December ethanol in 0.6 -0.5 regulatory arbitrage 0.4 before tax credit expiry 0.2 -1.0 0 80/81 83/84 85/86 87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 09/10 11/12f Jan-08 Jan-09 Jan-10 Jan-11 Jan-12f Producer margin Blender spread Corn Wheat SoybeansSource: Rabobank, Bloomberg, 2011 Source: Rabobank, Polity IV Project, USDA, Food and Agriculture Organization of theNote: Blender spread is the price of RBOB Gasoline-Denatured Ethanol, which approximates United Nations, 2011 the blending operating profit of US oil refineries. Producer margin is the estimate of the profitability.
14 | Rabobank Outlook 2012—Down, But Not Out commodities, with protectionist policy becomes an increasing aim of the decisions more easily resulting in trade government. The risk of an economic deficits or supply shortages. Supply slowdown and a reduction in support also tends to be less reliable in these programmes would have only a marginal nontraditional export countries due to effect on imports, as the government weather vulnerabilities, logistical constraints would remain incentivised to encourage and a lower degree of social stability, all domestic consumption. factors which lend themselves to a greater Grains and oilseeds tendency towards political intervention. In 2012, a record share of world grain exports Unsurprisingly, this results in markets having will come from the Black Sea region and to factor in risk premiums to account for the South America, potentially surpassing the uncertainty for both producers and share of the EU and the US (see Figure 2.12). consumers, thereby heightening near- This creates higher political risk and volatility term volatility. in markets as they grapple with the feast or We see grains, oilseeds and cocoa as the famine nature of exports from these rapidly commodities in the agri complex most at risk developing regions. in 2012. Our custom assessment of trade- A large part of this political risk is derived weighted geopolitical risks for sections of from the grains complex being regarded as the agri complex highlights the increasing a strategic national imperative, particularly political risk inherent to the corn and true for the Black Sea region. This leaves soybeans markets as marginal production agri markets increasingly dependent on shifts from the developed to the developing interventionist governments in the Black world (see Figure 2.11). We have generally seen Sea region, the main exporters of which improving risk profiles for soft commodities are Russia, Ukraine and Kazakhstan. Best though they have higher absolute levels, demonstrating their potential for despite being exacerbated by higher protectionist actions were the export bans exportable quantities which skews our metric imposed by Russia from 2010 to 2011, higher. Low stocks-to-use ratios across the Kazakhstan in 2008, and Ukraine in 2007 agri complex would further aggravate the and 2010/11. price effects of any changes in the political situation in the agri complex, such as: Additionally, the Ukrainian government recently enacted laws to facilitate control over • The potential for grain export bans or the the country’s exports in conjunction with a resumption of prohibitive export tariffs relaxation of export duties. The fact that in the Black Sea region is compounded CBOT Wheat prices rose 15.6% in the two by the likelihood the policies of the days spanning the imposition of the Russian constituent countries would move export ban demonstrates the immediate in parallel. impact such moves can have on markets. • With large shares of global grain and This move came in spite of market oilseed supply flowing from Brazil positioning already anticipating a yield and Argentina, there is a possibility that reduction of 8% following the previous a particularly damaging La Niña could month’s USDA WASDE report. encourage these governments to enact As the trend towards an increasingly policies to support domestic stocks and important role of nontraditional and more usage. Trucking industrial action in risky suppliers continues, substantial risk Argentina in October 2011 highlighted premiums have been, and must continue this susceptibility. Prohibitive export tariffs to be, built into grain and oilseed prices. on soybeans in Argentina continue to Increasingly strong buying from major create tension between the government importers will ensure that any supply and farmers. disruptions from these regions will be met • West Africa remains politically volatile and with significant price rises. we see further protectionist steps being As marginal increases in world production taken in 2012 as Ivory Coast considers come increasingly from countries with higher establishing a single-buyer policy. levels of political risk, the market tends to Production concentration in this region apply higher risk premiums to prices in the heightens this risk. short term as the chance of supply • Changes in Chinese engagement in the disruptions increases. We see this tendency import market are likely to be supportive being compounded by political of prices, as domestic food-price stability overreactions, mainly taking the form of
Section 2 Key themes for agri markets in 2012 | 15 export bans, which loom large in the market’s whether hard landing, soft landing or memory following the measures taken by maintaining the status quo—are likely to Russia in response to the 2010/2011 drought. have a smaller effect on demand for imports Export bans should be seen as a likely than is generally expected. We expect that response to any significant deterioration of the government’s bias in an environment the domestic inflation picture in the Black of renewed world democratisation and Sea region. seemingly less constrained domestic dialogue will be towards increasing focus on street- A key threat to the global corn complex level inflation and the price paid for food is the economic fragility of South America. by the average Chinese citizen, reinforcing Argentina in particular has experienced the status quo. consistently high inflation, as well as regular protests and export tariffs that prove a These effects are a big source of uncertainty common hindrance to trade and remain for markets and are compounded by the fact a risk for prices (see Figure 2.13). Having that Chinese supply/demand balances are integrated into global export markets, notoriously opaque. Our analysis suggests Argentina and Brazil now have a critical piece that inventories of grains and oilseeds of world trade. In addition to political risks, remain below levels we think the Chinese both countries have large domestic markets government expects in order to meet their they need to satisfy, and a very real risk goal of enhancing domestic price stability. remains that policies could be introduced West Africa to support domestic use in the event of a Most of the world’s cocoa supply is still supply-side shock. drawn from West Africa, a region which Chinese import policy remains politically volatile and prone to civil The Chinese government and its economy war as seen in 2010/11 in Ivory Coast, the are perhaps more closely linked than those world’s largest cocoa producer. This political of any other major power and, as a result, risk remains, though difficult to quantify, with the ruling party is able to exert more control the largest risk being the return of civil war to over agricultural trade flows than elsewhere. the Ivory Coast, followed by the introduction With this in mind, we believe there is more of a central buyer there, as seen in Ghana, impetus for the Chinese government to to provide price stability. The Ivory Coast increase than to reduce imports of agri government can reasonably expect commodities in 2012. that mimicking the policy of its neighbour will limit the cross-border smuggling that We forecast a slowing rate of economic is currently taking place in order to take growth to have little effect, and it may even advantage of, or arbitrage, the price stimulate import demand in the face of differential between the two nations. The continuing government rhetoric about food next obvious step is West African regional self-sufficiency. This is driven by domestic integration to form a cocoa OPEC, though pressure to see real wealth growth for the we see the risk of this happening as minimal. public at large and to hold political unrest at bay. Changes in China’s economic trajectory—Figure 2.12: World wheat and corn exports by region, Figure 2.13: Argentina’s inflation profile, YOY change in price1961/62-2011/12f indices, Dec 2000-Oct 2011 140 300 250 120 250 200 100 200 80 150million tonnes percent percent 150 60 100 100 40 50 20 0 50 0 -50 -20 -100 0 Oct-01 Oct-11 11/12f 61/62 63/64 65/66 67/68 69/70 71/72 73/74 75/76 77/78 79/80 81/82 83/84 85/86 87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 09/10 Dec-00 Aug-02 Jun-03 Apr-04 Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10 US EU South America Black Sea region Other CPI CPI: Food and beverages Big Mac Index Argentina (RHS)Source: Rabobank, USDA, 2011 Source: Rabobank, Bloomberg, The Economist, 2011
16 | Rabobank Outlook 2012—Down, But Not Out The risks of production concentration in such volatile countries mean there is a significant upside skew to the cocoa price, contingent upon changes in the West African political situation. Elections Elections provide significant scope, outside the expected changes to agricultural policy, to catalyse protectionist policy implementation for short-term economic gain. Any such policy action, be it new tariffs or accommodative domestic policy, can be easily justified as responding to perceptions of global economic uncertainty to ensure domestic stability. We will monitor a number of specific elections during 2012 in which we see potential surprises for markets and resulting price effects for agri commodities (see Figure 2.14). Figure 2.14: Selected political events, 2012 Estimated date Assessed agri Event description market impact US 3 January Low First Republican party primary in Iowa Egypt January-March Low Parliamentary election Russia 4 March Low-moderate Presidential and local elections US 6 March Low Super Tuesday, 10 states; Republican party candidate Iran 29 March Moderate Parliamentary election France 22 April Moderate Presidential elections, first round France 10 June Moderate Parliamentary elections, first round Mexico 1 July Moderate Presidential and parliamentary elections India July Low Presidential elections (elected by parliament) Kazakhstan August Moderate Parliamentary elections Turkey August Low Presidential elections Brazil 7 October Moderate Municipal elections, first round Ukraine 28 October High Parliamentary elections October 2012- China Moderate Communist party internal leadership selection March 2013 US 6 November Moderate Presidential, House and 1/3 of Senate elections Ghana December Moderate Presidential and parliamentary elections Source: Rabobank, relevant governments, Bloomberg, New York Times, 2011
Section 2 Key themes for agri markets in 2012 | 17Capacity constraints heavily on higher-risk production regionsSupplies of a number of agri commodities will such as the Black Sea region. At the sameremain historically low in 2012 as the world’s time, the break-even price in these countries,capacity to respond to elevated prices by many of which are in historically low-costincreasing production continues to be areas, is increasing as production costs riseconstrained. Many agricultural markets and credit remains tight. We expect theseremain susceptible to supply-side shocks supply constraints to be compounded by theas inventory levels remain tight—though already low inventory levels, which willnot at historical lows for most commodities— continue to be supportive of agri commodityand high production costs, lack of land prices in 2012 (see Figure 2.15). This is reflectedavailability and capital restrictions limit by our base-case price forecasts, wherea recovery in inventories. we expect to see a slight easing in most commodities, but a very soft landing withWe forecast global ending stocks to decline prices remaining at historically elevated levels.in 2011/12 for five of the eight commoditiesincluded in our coverage, most notably in Supply squeezecoffee (-24%), soybeans (-11%) and corn (-7%). Supplies of most agri commodities leadingMore modest declines are forecast for wheat into 2012 remain precariously tight with(-3%) and cocoa (-2%), while stocks are some at or near record low stocks-to-useforecast to build for cotton (20%), palm ratios. The USDA forecasts the world’s totaloil (12%) and sugar (11%). Most of the grain and oilseed stocks-to-use ratio tocommodities for which we forecast to see a decline in 2011/12 to below 20%—the lowestdecline in stocks despite record high or near level since 2007/08. This is despite the USDA’srecord high production also experienced forecast for the global grain and oilseed areasmaller incremental growth in production. harvested to increase by the largest amountThis is unlike previous cyclical commodity since 2008/09 and to reach a record largebull rallies where production increased at 755 million hectares. The primary driver acrossa pace sufficient to meet growing demand the complex is the tightening of the cornand replenish stocks. Global grain and balance sheet for a third consecutive year,oilseed stocks-to-use ratio, for instance, bringing the stocks-to-use ratio to the lowesthave remained below the long-term average level in nearly 40 years. The persistent lowfor the past 10 years, despite elevated year- level of global corn stocks in the face ofon-year increases in production. record high prices and production will continue to be a key price determinant acrossMuch of the low-hanging fruit in terms of the entire complex in 2012, despite a sharpproduction growth through land expansion year-on-year increase in global wheatand yield advancements has been exploited, production. With corn production unablecausing output growth to be more expensive to surpass consumption for a secondand have a higher risk profile. In 2012, we consecutive year, the ability to replenishexpect production growth will be hindered inventories of crops which lost planted areaby the limited availability of global arable to corn in 2011—as soybeans did—will alsoland, which is causing the world to rely more be challenged. As a result, we expect corn Figure 2.15: Global grain and oilseed stocks-to-use and 5-year average YOY change in production , 1969/70-2011/12f 35 80 YOY change (million tonnes) 30 60 percent 40 25 20 20 0 15 -20 69/70 75/76 79/80 83/84 87/88 91/92 95/96 99/00 03/04 07/08 11/12f Stocks-to-use 5-year average change in production Source: Rabobank, USDA, 2011
18 | Rabobank Outlook 2012—Down, But Not Out to lead the grains and oilseeds complex as Europe and the US), which also have the for the beginning of 2012, keeping the smallest amount of production constraints, soybean-to-corn price ratio historically has flatlined, pushing an increased share of low and challenging wheat’s historical production growth to countries such as premium to corn. Russia, Brazil, Ukraine and Argentina. The world’s reliance on these emerging Risk aversion may limit the amount of agricultural producers is expected to increase capital deployed to increase agri commodity to a record high 18% in 2011/12, reducing production in 2012 (see Figure 2.16). traditional exporting countries’ share to Continued uncertainty surrounding the below 40% for the first time on record. economic and political outlook for 2012 is likely to curb the amount of capital As their market share has increased in recent deployed in the global agriculture sector. years, so too has the variance in global yields At the farmgate level, producers will be for corn, soybeans and wheat (see Figure 2.17). hesitant to invest in large purchases or land While it is still too early to determine yield expansion as they are uncertain of future levels for the 2012/13 crop, the outlook for returns. Political debates surrounding winter crops in the Black Sea region is already the continuation of many government being closely monitored due to adverse programmes which support the agriculture planting conditions. Over 30% of Ukraine’s sector further fuel this uncertainty. This theme new crop winter grain could be lost due to of conservatism will play out more strongly the current drought. in regions that are deemed to be higher risk As global agri commodity production by investors who are withdrawing from continues to expand into emerging markets, emerging markets in a ‘flight to safety’. From so too will the battle for acres which persists an agricultural perspective, this will impact in developed economies such as the US and those countries that have shown the largest the EU. This battle is likely to intensify in 2012 growth in production in recent years: the as the increase in grain area harvested in 2011 emerging markets. Additionally, a more (at the expense of oilseeds) did not result in a conservative outlook for the economic sufficient production response to replenish growth in emerging markets will likely stocks. Yet at the same time, the stocks-to-use limit the volume growth in loans to the ratios of vegetable oils are likely to fall to their agriculture sector. lowest levels in nearly 40 years for a second Increased yield volatility consecutive season. This will likely cause The market share of global agricultural ending stocks of both grains and oilseeds in production capacity in countries with higher 2011/12 to show a year-on-year decline for yield variance will continue to grow in 2012. the first time since 2003/04. We expect corn We expect the market share of regions with values to offer Northern Hemisphere farmers elevated production risks, such as the Black higher profits than other row crops, further Sea region and Argentina, to rise further in reducing the area available to plant to 2012. The production capacity in traditional oilseeds and cotton. agri commodity producing countries (such Figure 2.16: Brazil financial system loans to agriculture and Figure 2.17: Global yield variance and production shares YOY change in Brazil’s total area planted, 2002/03-2011/12f 4 20 5 22 18 20 YOY Change in BRL billion 3 16 4 million hectares 2 14 18 percent percent 12 1 10 3 16 8 0 6 14 2 -1 4 12 2 -2 0 1 10 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10e 10/11f 11/12f 81/82 86/87 91/92 96/97 01/02 06/07 11/12f Global yield variance of corn, soybeans and wheat YOY change area planted Agriculture loans to Brazil (RHS) Argentina, Brazil and Black Sea region share of global production (RHS) Source: Rabobank, CONAB, Bloomberg, 2011 Source: Rabobank, USDA, 2011
Section 2 Key themes for agri markets in 2012 | 19Higher price floors potential as prices still remain below theThe cost to produce agri commodities will highs achieved in 2008. Furthermore, thecontinue to increase in 2012, raising farmers’ diminishing availability of new arable landbreak-even levels and creating higher floor will push farmers to invest more in crop inputprices. Higher production costs will limit the technologies such as seeds and equipmentdownside price potential for most agri to increase production through higher yields.commodities in 2012 as prices must persist This more capital-intensive per hectare costabove break-even in order to encourage of growing crops against a backdrop of riskfarmers to increase production. The cost aversion by lenders will increase the priceto produce crops such as wheat and corn incentive required by farmers.(globally weighted by production) hasroughly doubled over the past 10 years.Nearly all of the cost components—such asfertiliser, energy and land—are expected toremain elevated for the 2012 season. Notonly have average global production costsincreased, but the gap between low-costproducing countries and marginal producershas also narrowed. For instance, thecost advantage of producing wheat inRussia as compared to the US fell fromUSD 250/hectare to less than USD 50/hectarein 2011. This trend of diminishing costadvantages of countries with a higher riskprofile is likely to continue in 2012, whichwill consequently limit their ability to offerexports at a discounted price relative tohigher-cost producing countries.We expect this higher cost structure topersist in 2012, driven by higher energy pricesand strong farmer demand due to the highprofits achieved in 2011 (see Figure 2.18).Fundamentals in both the energy andfertiliser markets will remain supportive ofprices in 2012 as capacity growth is slow torespond to demand growth. Global fertiliserconsumption is likely to have risen 2.5% to176.4 million nutrient tonnes in 2011/12—asecond year of record high demand. Althoughwe do not expect fertiliser prices to reach newhighs in 2012, we do see further upside price Figure 2.18: Index of global corn and wheat production costs and prices, 2000-2011f 400 350 300 2000=100 250 200 150 100 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f Wheat production costs Corn production costs CBOT Wheat CBOT Corn Source: Rabobank, IHS Global Insight, USDA, Bloomberg, 2011
Section 3 Agri Commodity Outlooks | 213 Agri Commodity Outlooks Given the highly uncertain macro economic We also adopt Rabobank’s global FX environment at present, we have decided strategists’ forecasts as our base case, which to provide some scenario parameters for shows limited moderation in the US dollar our price and fundamental forecasts this expected against most currencies in 2012, year. These three scenarios are provided although we factor in some upside relative to give some guidance on our level of to commodity currencies. confidence in our forecasts and the macro- Our base case implies little impact on level assumptions we have applied in demand from an agricultural perspective, formulating these forecasts. Our base-case other than perhaps a continuation of protein macro and FX scenarios have been applied demand substitution—from red meat to to our central forecasts for each of the poultry—in the struggling developed various agri commodities. economies. This scenario also assumes very Base case: Stumbling along limited impact on agricultural demand from In the base case, Rabobank’s macroeconomics emerging-market economies, with growth team suggests that the most likely outcome expected to continue at trend levels, which is for the global economy in 2012 will be one supportive for almost the entire agri complex. of very weak but positive global economic High case: Recovery stronger and faster growth. We apply this as the central driver than expected for the base case in our commodity price The major assumption we factor into this forecasts. A mild double-dip is expected in scenario is a quicker and stronger recovery in the major developed economies of Europe global growth conditions than we currently and the US, but importantly for agricultural forecast. This would require a swift and clear demand, only a minor softening in growth resolution to the euro-area crisis, a reversal in is forecast for emerging-market economies. investor money flows back into commodities A lot will no doubt depend on the timing and higher growth economies, and a return and effectiveness of a resolution of the of confidence to global markets. In this troubles in the euro area, which at this stage scenario, agricultural demand would remain still seems some way off. We assume that a robust in both developed and emerging- workable solution will be in place by Q1 2012 market economies. We expect this scenario and we factor in a break-up of the bloc as would provide a stronger devaluation of the only a 10% to 15% probability. This scenario US dollar as safe-haven assets are sold in implies a modest reversal in investor money search of growth. flows, but not a complete return to the risk-on environment of 2010. Significant range-bound trading with choppy markets and a lack of clear flat price direction would be likely.
22 | Rabobank Outlook 2012—Down, But Not Out Low case: From bad to worse This is our downside scenario for world growth and demand. Here we factor in a prolonged EU debt crisis, with the debt concerns spreading to the core countries of the bloc. Contagion fears paralyse markets in Europe with knock-on effects globally and sustained risk-off environment results. Importantly for our agri complex forecasts, in this scenario we factor in a substantial contraction in emerging-market growth which would significantly crimp demand and imports of key agri commodities. Consumers would be forced to transition to lower cost sources of calories and proteins. In this scenario, a stronger US dollar environment would likely persist in 2012 as liquidity and safe-haven assets are sought by investors.
Section 3 Agri Commodity Outlooks: Wheat | 23WHEAT Q3’11 Q4’11f Q1’12f Q2’12f Q3’12f Q4’12f 12-month outlook from spotCBOT wheat USc/bu 688 610 595 630 615 595Matif wheat EUR/tonne 199 170 162 175 172 166 800 750 Low case Base case High case 700 Support from coarse Wheat prices continue Winter wheat grain markets fades to be supported by abandonment and 650 more quickly than coarse grain prices― yield deterioration 600 expected particularly in the US exceed expectationsUSc/bu 550 as drought in the At-trend exports from Global demand southern states of 500 the major producers accelerates in 2011/12, the US intensifies 450 drive 2012/13 global largely offsetting the stocks-to-use fourth largest global Drought conditions 400 intensify, severely above 33% wheat crop on record 350 affecting crops in 300 Crop conditions Poor winter wheat the Black Sea region improve in spring, planting conditions in 2010 2011 2012 and global yields the US and Ukraine US corn fundamentals exceed our sub-trend, result in sub-trend tighten more than base-case forecast crops―but not a total expected, forcing Historical Base case Low/high case Spot crop failure prices into a rationing mode Source: Bloomberg, Rabobank Lower wheat prices are forecast for 2012 than risk to our base-case forecasts come from we have seen in 2011, however from current production uncertainty for the 2012/13 spot levels our view is neutral. While a tight season, with incremental wheat production feed-grain balance sheet is expected to being generated in more politically volatile provide some support to wheat prices, and less reliable climatic regions as discussed particularly in the US, elsewhere we see the in our capacity constraints section. sharp recovery in wheat production having Global wheat production is forecast to a bearish impact on prices, relative to the increase 6% to 684 million tonnes in the levels achieved in 2011. 2011/12 season, the second largest crop on Wheat fundamentals on their own reflect a record. With the Northern Hemisphere crop bearish situation from current price levels; in the bin, the only production uncertainty although high protein and high quality remaining at this stage of the wheat season supplies are less abundant, there will be is in the Southern Hemisphere countries of ample supplies to meet global demand needs Argentina and Australia. Despite the ongoing in the season ahead. The outlook for the threat from a strengthening La Niña weather 2012/13 season is not so clear with winter pattern, production in both countries does wheat planting conditions in a number of not appear at risk, and harvest is now well regions far from ideal. underway. However, global wheat consumption is forecast to reach a record CBOT wheat prices are forecast to average high of 676 million tonnes in 2011/12, up 14% lower YOY in 2012 as sharply higher 4% YOY—offsetting fewer supplies of feed world production results in strong export grains—which we expect will limit the competition and a build-up in inventories recovery in global wheat inventory levels to for the 2011/12 season. Our base case for just a 2% increase YOY. Despite the increase wheat prices indicates a mostly neutral view in stocks, record high global wheat demand from current levels, following a strong sell- is forecast to keep the stocks-to-use ratio off in 2H 2011. We do not expect a further unchanged from last season at 30%. It is collapse in prices, while ample supplies worth noting that this remains well off the will prevent upside potential, in the absence low of 20% in 2007/08 that triggered record of crop failure in 2012. A weaker US dollar— high wheat prices. as outlined in our base-case macro assumptions—will likely provide some Wheat prices in the US are expected to be support for CBOT prices, while a lack more a function of the domestic corn market of export competitiveness in the EU will and less affected by the global wheat see Matif prices under pressure. We do not dynamics than prices elsewhere. Tight anticipate significant variation between our corn fundamentals in the US, following scenarios from the demand side of the ledger, the extreme heat of summer 2011 and with wheat demand relatively inelastic and subsequent yield downgrades, are expected generally a function of supply. The most to support US wheat prices as domestic prices
24 | Rabobank Outlook 2012—Down, But Not Out decouple from the global market. The wheat- USDA is forecasting a 24% YOY fall in US corn futures price spread—which traded at wheat exports to the second lowest level an unusual inverse throughout 2H 2011— of the last five seasons, while EU exports are will be important in determining how much expected to drop 26%. Increased global wheat works into the feed ration in the exportable supplies are the major driver remainder of the 2011/12 season. The behind this shift in global demand, primarily premium for corn prices over wheat (spot- to the Black Sea region, where production has price basis) during 2H 2011 reached the rebounded 43% and export bans have been highest level since 1995/96 and has repealed following the 2010 drought. Despite maintained a premium for the longest period this impressive recovery in just 12 months, in history. While this is unusual, we expect aggregate Black Sea region production is that corn prices will continue to trade at a expected to fall just short of a record in premium to wheat for some time to come, 2011/12, although Kazakhstan is forecast to given the fundamental differences. The USDA produce a record crop of 21 million tonnes, forecasts a 22% YOY increase in US wheat a 116% YOY increase. We expect exports from feeding to 160 million bushels in 2011/12; the Black Sea region to reach a combined this estimate remains well below the levels 38 million tonnes in 2011/12, the second reached in 2008/09. highest aggregate for the region on record, and a 27% market share is forecast to be the Global supply of high quality and high largest share of global trade from the region protein wheat is expected to remain relatively on record. tight despite this season’s large global wheat crop. Widespread flooding in key Hard Red Wheat exports from the US and the EU are Spring (HRS) wheat-producing states in the forecast to represent a record low share of US and Canada—particularly North Dakota world trade in the 2011/12 season. Combined and Saskatchewan—resulted in widespread exports from these two key regions are abandonment in 2011, pressuring supplies forecast to fall from 45% last season to just and resulting in a strengthening in the 31% in 2011/12. Increased export competition protein price premium. This is reflected by this season has also been intensified by the sharp increase in the spread between sizeable crops from both Australia and the MGEX and CBOT wheat futures markets. Canada. The Australian exportable surplus This spread is expected to remain elevated, was recently boosted by a stock revision of at least during the first half of 2012, as tight around 3 million tonnes and is likely to supplies and the need to encourage plantings benefit from the country’s largest wheat crop of spring wheat against corn and even on record at a forecast 26.2 million tonnes. soybeans will likely support MGEX prices. We forecast a record large national export programme of 21 million tonnes for Sharply higher global wheat production is Australia, constrained only by domestic forecast to result in significant export logistics and increasing low-cost competition substitution from lower cost origins, but US from the Black Sea region into South East wheat exports have been surprisingly resilient Asian markets. Greater production in Western in the first half of the 2011/12 season. The Australia this season should allow exports to Figure 3.1: US all-wheat feeding and the wheat/corn spread, Figure 3.2: MGE vs CBOT wheat spread and HRS carryout, 2001/02-2012/13f 2001/02-2011/12f 300 7 250 10 6 9 250 200 8 million bushels 5 million bushels 200 7 USD/bu USD/bu 4 150 6 150 5 3 100 4 100 2 3 50 50 2 1 1 0 0 0 0 10/11 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 11/12f 12/13f 10/11 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 11/12f All-wheat feeding Maximum CBOT wheat/corn spread (RHS) HRS carryout Max MGE/CBOT wheat spread (RHS) Source: Rabobank, USDA, Bloomberg, 2011 Source: Rabobank, USDA, Bloomberg, 2011
Section 3 Agri Commodity Outlooks: Wheat | 25 exceed last season’s levels. Canadian exports conditions and sub-trend emergence levels are forecast to jump 9.1% to 18 million tonnes heighten the risk of crop losses in these despite the growing uncertainty being regions in 2012/13. This production caused by the expected abolishment of the uncertainty is likely to provide some single exporter policy next season. support to deferred contracts for both the Matif and CBOT markets; however, conditions European wheat prices look set to have the in the Northern Hemisphere spring will be most potential for downside due to lower- the key in determining yields and production. cost export competition from the Black Sea Without a significant supply-side shock in region, although a weaker euro may provide 2012/13, we do not expect prices to return a partial buffer early in 2012. European, and to highs seen in 2010 or 2011. most notably French, wheat exports slumped early in the 2011/12 season as Black Sea region exports dominated market share into the key North African importer destinations, and we expect these exports will remain under pressure in 2012. We expect EU wheat stocks to climb 13% YOY, likely bounding Matif futures prices well below the highs of 2011 and above the lows of 2009. A range of EUR 125/tonne to EUR 196/tonne is expected, given the weaker fundamental situation next season. Our initial estimates for 2012/13 suggest it may be difficult to replicate this season’s near- record production next season as we model area planted globally unchanged to slightly lower on the basis of significantly weaker wheat prices year-on-year and increased competition for planted area from other row crops. Assuming trend yield at this early stage of the season in most regions, our initial estimates suggest a 3% YOY decline in global wheat production to 662 million tonnes in the 2012/13 season—still the fourth-largest global wheat averages on record. Adverse winter wheat planting conditions in Ukraine, and in the southern US due to ongoing drought, suggest it will be difficult to achieve trend yield this season. Additional poor cropFigure 3.3: YOY changes in Black Sea region, US and EU exports, Figure 3.4: World wheat production and yield, excluding China2008/09-2012/13f and India, 2000/01-2012/13f 550 2.9 20 15 500 2.8 million tonnes 10 2.7 tonnes/hamillion tonnes 450 5 2.6 0 400 -5 2.5 -10 350 2.4 -15 300 2.3 -20 10/11 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 11/12f 12/13f 08/09 09/10 10/11 11/12f 12/13f Black Sea region Global production excl. China, India, US Global yield excl. China, India (RHS) US EU Ukraine Russia Kazakhstan US production Trend lineSource: Rabobank, USDA, 2011 Source: Rabobank, USDA, 2011
26 | Rabobank Outlook 2012—Down, But Not OutCORNCBOT Q2’11 Q3’11 Q4’11f Q1’12f Q2’12f Q3’12f Q4’12f 12-month outlook from spotUSc/bu 732 696 620 610 645 630 610 800 750 Low case Base case High case 700 Corn plantings Further US corn New crop US corn 650 exceed 95 million yield reductions acreage is less than 600 acres in the US, with force increasing 93 million acres andUSc/bu prices falling to USD reliance on volatile yields disappoint 550 5.00/bushel on record emerging-market 500 crop expectations exports Policy changes restrict Ukrainian/ 450 Importer demand is Ethanol production Argentine corn 400 weaker amid hits record levels, exports 350 economic downturn; despite blenders’ USD rally hinders credit lapsing at High oil prices and 300 low USD, drive US 2010 2011 2012 exports the end of 2011 ethanol demand to Weak La Niña helps China imports 5.2 billion bushels South American corn 4 million tonnes of US Historical Base case Low/high case Spot exports hit 34 million corn despite record tonnes domestic crop Source: Bloomberg, Rabobank Rabobank forecasts lower year-on-year CBOT see corn prices test USD 7.00/bushel during corn prices in 2012. However, we do expect Q2 2012. a seasonal uptick in prices, averaging Rabobank forecasts continued reductions USD 6.45/bushel in Q2 2012 before easing to to the USDA’s corn ending stocks projections USD 6.10/bushel in Q4 2012. We expect this as use creeps higher on strong ethanol mid-to-late year fall will result from 2012/13 margins and relatively strong exports, while acreage expectations being ratcheted higher simultaneously, there is also a significant risk in the US. Our forecast 2011/12 US corn of further yield downgrades in the final 2011 ending stocks-to-use ratio would be the crop report due in January 2012. In broad lowest on record and provide strong price terms, most categories of US demand have support in the near term. been strong or strengthening since the start Q2/Q3 2012 corn prices will prove difficult to of the 2011/12 marketing year in August. We forecast as the US corn complex moves from expect that to continue, with total US corn a strong deficit to a moderate surplus, with use in 2011/12 forecast to reach 12.8 billion prices highly path-dependent as the market bushels, a 1.9% decrease from 2010/11 attempts to guide 2012/13 acreage in the US. levels. Key risks to our forecast include the Although a long way out, we see our corn possibility of negligible La Niña effects and price forecasts likely to be more a function subsequently strong South American exports, of South American weather and supply as we currently forecast a lower export expectations for the US 2012 crop than outcome than the USDA for the continent. economic outcomes. Ethanol production Fundamentals show oil prices to be a key responses to oil price changes remain our driver of future corn prices, as we foresee main mechanism to bring economic greater corn demand from ethanol variability into the corn complex. production than the USDA for 2011/12 and further increases in 2012/13. Margin Our low case would also involve the winding contractions from falling oil prices are a back of the increases in protein consumption key risk to our forecast. we have assumed for the developing world. If weaker-than-expected growth outcomes The ongoing role of speculative/managed are realised in the developed world, as money in the agri complex, and in corn assumed in our low case, we could see oil markets more specifically, will play an prices dropping below USD 100/barrel important role in price discovery for corn in and a significant reduction in corn prices the coming year. Current net long positions towards USD 5.00/bushel as ethanol of managed money are near the lows set in demand is reduced. Under our high case, July 2010, and we expect it to be difficult for where the global economy experiences significant liquidations in speculative net resurgent growth, we would see higher oil long positions to occur from these levels as prices, strengthening demand and rebuilding structural longs remain. Analysis of origin- of stocks. These macro conditions would buying suggests a price floor of approximately
Section 3 Agri Commodity Outlooks: Corn | 27 USD 6.00 will hold until 2012/13 crop acreage reach 5.2 billion bushels as corn acreage is and conditions are well established. expanded at the expense of soybeans, with our forecast near-term futures price ratio Further out the curve, our downward bias between the two commodities continuing for prices strengthens with the 2012/13 to favour corn. Given unchanged oil prices, marketing year likely to produce the largest ethanol production should remain near global corn crop on record. Rabobank capacity and meet our forecast, as corn projects that an equal record of 93.5 million remains in the USD 6.00/bushel to acres will be planted in the US, further USD 7.00/bushel range. Our base-case displacing soybeans as producers capitalise economic growth assumptions would, on strong price incentives and increase corn without increased disturbance in the acreage in marginal production regions. Middle East, see Brent Crude oil prices stay Our state-by-state models suggest that the in the USD 100/barrel to USD 110/barrel majority of the 1.7 million planted acreage range during 2012. increase will be from nontraditional US corn export sales, with a strong pace producer states. set for 2011/12, should be supported by a We forecast an additional 850,000 acres weakening US dollar. We forecast exports of corn to be planted in North Dakota as it to be 1.62 billion bushels, 25 million bushels recovers from the severe flooding of 2011. ahead of current USDA expectations. There There is significant income risk as farmers remains a risk that sales are cancelled as planting corn for the first time receive crop buyers switch to cheaper origins once crops insurance returns in line with county yields are more certain. Structural factors such rather than proven yields. This uncertainty, as China’s ability to import only US corn along with resilient spring wheat prices, as well as geographical advantages in caps our expectation of increased exporting to Mexico, where a drought is substitution in North Dakota. forecast to have reduced the 2011/12 expected crop by 3.5 million tonnes from Although a long way off, we forecast US prior USDA estimates, should support yields of 154 bushels/acre based on our export sales in Q1 2012. state-by-state model. This figure was impacted by the increased acreage from Rabobank forecasts that the USDA will marginal states. Following this, our have to increase feed demand to 4.7 billion production forecast is 13.25 billion bushels, bushels from the current 4.6 billion bushel a 7.9% increase on our 2011/12 forecast. estimate. The November WASDE report stated that the USDA has underestimated We forecast a record 5.1 billion bushels of US domestic corn demand in 20 out of corn to be used in ethanol production 30 years of analysis, which Rabobank during the 2011/12 marketing year as considers worth highlighting. The average distillers operate on strong margins at full error is 215 million bushels. This supports pace despite the risk caused by the imminent our view that domestic use estimates will withdrawal of the blender’s credit. Corn use be increased in the new year. We forecast for ethanol production in 2012/13 is likely to 4.5 billion bushels of US feed demand inFigure 3.5: US corn planted area and yield, 2000/01-2012/13f Figure 3.6: Matrix of estimated ethanol production profitability (in USD/gallon) 100 170 Brent crude price 80 90 100 110 120 95 160 (USD/barrel) Ethanol price1 2.05 2.28 2.52 2.76 2.99 bushels/acremillion acres 90 150 (USD/gallon) 85 140 5.5 0.03 0.27 0.50 0.74 0.98 80 130 6.0 -0.15 0.08 0.32 0.56 0.79 75 120 Corn price (USD/bushel) 6.5 -0.34 -0.10 0.13 0.37 0.61 70 110 00/01 10/11 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 11/12f 12/13f 7.0 -0.52 -0.29 -0.05 0.19 0.42 1 RBOB gasoline/Brent crude relationship based upon OLS regression Figure assumes a DDG price of USD 220/tonne and an RBOB gasoline/ethanol spread of USD 0.10/gallon. Area planted Yield (RHS)Source: Rabobank, USDA, 2011 Source: Bloomberg, USDA, Rabobank
28 | Rabobank Outlook 2012—Down, But Not Out 2012/13 as DDG substitution increases and either our or the USDA’s forecast, there the cattle herd shrinks. will be some form of government intervention. We see several likely Our global production outlook for corn in catalysts that could bring further export 2011/12 is relatively large from a historical limitations into effect: perspective, with Brazil, Ukraine and Argentina helping to moderate weakened • The government decides that domestic expectations for the US crop, albeit with prices are too high and acts to support greater downside risk than seen in previous domestic consumption, years. Although record crops are expected • The current poor outlook for the 2012/13 in many countries, world trade (excluding wheat crop deteriorates further and the US) during the remainder of the resulting export bans cover the entire 2011/12 marketing year is likely to see grains complex, supply availability skewed to the downside as political considerations operate in • No IMF funding deal is struck and the conjunction with uncertain environmental Ukrainian government sees the record outcomes. In addition, we see potential for high price for exports and re-introduces yields in Argentina to be reduced by an tariffs to assuage cash flow issues. adverse La Niña weather pattern. Rabobank forecasts 2012/13 will see We expect 27.5 million tonnes of corn global corn production of 885 million to be exported from South America in tonnes, a 3.4% increase on our 2011/12 2011/12. Argentina continues to operate forecast and the highest on record. This in a pressured economic environment with forecast builds on our greatly increased persistently high inflation and persistent acreage figure for the US and sees an government intervention in the foreign extra 3 million tonnes in exports from exchange market. Further economic stress South America as soybeans are displaced may promote more widespread industrial in a situation analogous to that in the US. action, causing substantial stress to a world Ukrainian production estimates are corn complex which relies on strong tempered by strong incentives to plant Argentine exports. We will monitor this more barley and sunflower and closely and adjust our forecasts as necessary. consequently, we have reduced our export forecast to 9.3 million tonnes for 2012/13. In a year of a record corn production, We expect global corn trade to be resurgent Ukrainian exports remain uncertain with the as China imports a record 7 million tonnes USDA currently expecting 12 million tonnes and the world economy pulls itself to its to be exported in the 2011/12 marketing year. feet. At this point, we forecast ending Our analysis suggests 11 million tonnes will stocks to be 123.8 million tonnes with be more realistic, with 9.5 million tonnes a stocks-to-use ratio of 12.6% relieving our low case, which would put significant some of the pressure we forecast ahead upward pressure on corn prices. Given the for 2011/12. need to raise the government-mandated export cap of 10.5 million tonnes to meet Figure 3.7: Global corn exports, US vs ROW, 1972/73-2012/13f 120 60 100 50 million tonnes 80 40 percent 60 30 40 20 20 0 10 80/81 90/91 00/01 10/11 72/73 74/75 76/77 78/79 82/83 84/85 86/87 88/89 92/93 94/95 96/97 98/99 02/03 04/05 06/07 08/09 12/13f US ROW Rest of world share of exports (ROW) Source: Rabobank, USDA, 2011
Section 3 Agri Commodity Outlooks: Soybeans | 29SOYBEANSCBOT Q3’11 Q4’11f Q1’12f Q2’12f Q3’12f Q4’12f 12-month outlook from spotSoybeans USc/bu 1,358 1,165 1,178 1,226 1,260 1,251Soy oil USc/lb 55.8 49.4 48.7 50.2 49.1 47.5Soymeal USD/ton 230 300 310 290 330 335 1,400 Low case Base case High case Record large US corn US soybean planted China’s imports 1,300 harvest results in area declines to a grow 15% or more our low-case corn 5-year low of less YOY and exceed price level of than 74 million acres 60 million tonnes 1,200USc/bu USD 5.00/bushel in 2012/13 South American 1,100 Chinese imports fall The South American production below below the USDA’s exportable surplus 133 million tonnes 56.5 million tonne is record large at 1,000 USD 1/gallon forecast in 2011/12 56 million tonnes in 2011/12 biodiesel credit 900 US soybean 2012/13 extended in 2012 2010 2011 2012 planted area remains Chinese import flat YOY or rises growth accelerates Historical Base case Low/high case Spot above 75 million 12% YOY in 2011/12 to acres 58.5 million tonnes Source: Bloomberg, Rabobank Soybean prices in 2012 are poised to fall from Based on our analysis of the corn balance the levels seen in 2011 but are likely to remain sheet, we forecast corn prices will continue historically elevated even though slowing to outperform soybean prices during the global growth threatens to temper demand. beginning of 2012 as corn must win the US Our base case shows significant upside for battle for acres. We expect soybean planted deferred prices from spot, as soybeans area to lose more than 1 million acres to corn strengthen relative to corn in 2H 2012. Based and decline to 73.9 million acres in 2012/13— on our low case, we view soybeans as the the smallest area planted since 2007/08. most defensive commodity in the grain A rebound in soybean yields to a trend of and oilseed complex, given their relative 44 bushels/acre would mitigate the drop in underperformance in 2011 and the large planted area, resulting in a 5% YOY increase in emerging-market demand profile. However, production to 3.21 billion bushels. This would with our forecast for lower corn prices cause the market to be even more sensitive in 2012, we expect the spillover bullish to adverse weather developments as a result sentiment which was a key driver for of yields playing such a pivotal role in soybean prices during 2011 to fade. determining whether or not US soybean production will increase in 2012/13 or decline Yet a floor price will be set based on South for a third consecutive year. This 5% YOY America’s production costs and Chinese increase in US production would allow US import demand, as US farmers plant a record exports to increase by less than 5 million large corn acreage in 2012/13 largely at the tonnes—far below the average annual pace expense of soybean area. We expect this will needed to reach the growing Chinese import cause the US to concede its position as the demand. This will require South America to world’s largest soybean exporter to Brazil for increase production in 2012/13 by at least a second consecutive year and will shift price 2 million tonnes in order to prevent a further seasonality to reflect South America’s crop drawdown in global soybean ending stocks. calendar. Consequently, we believe the soybean-to-corn price ratio will reverse from The ability of global soybean production historically low levels as early as Q2 2012— to grow in 2012/13 is likely to be affected albeit at lower absolute year-on-year values. by South American capacity constraints. This lower price outlook for soybeans in 2012 Favourable weather and increased soybean will be limited, given the supply constraints plantings in Brazil are supportive of record inherent in soybeans’ expansion into new high production and exports available from territories which have a higher break-even South America for 2011/12. We forecast the price floor and higher political risks. Downside combined soybean production of Brazil, price risk will also be mitigated by the Argentina, and Paraguay to reach a record relatively inelastic biodiesel demand for high of 134 million tonnes in 2011/12, further soy oil and by China’s declining soybean solidifying the region’s importance in meeting production, which will be supportive of global demand. However, there are signs that its need to increase imports year-on-year. the pace of land expansion is slowing in Brazil
30 | Rabobank Outlook 2012—Down, But Not Out and Argentina, creating a biannual battle for appreciation and higher input costs are acreage. From 2000/01 to 2007/08, the reducing the cost advantages of expanding combined harvested soybean area in these soybean production in Brazil. Since we expect three countries increased by an average of the Brazilian real to remain volatile and 7% (even when accounting for a year-on-year stronger in 2012, the cost advantage of decline as a result of the global financial buying inputs in domestic currency while crisis). Since then, harvested soybean area selling crops in US dollars is diminishing. has only risen by an average of 4%. As farmers Consequently, incentivising Brazilian farmers slow the pace of their land expansion, the to undertake further acreage expansion will battle for acres between major row crops in require a higher CBOT soybean price. For Brazil, which has prevailed for many years in instance, in the state of Mato Grosso, where the US, is clearly becoming a biannual event. soybean production growth increased the For instance, in the Brazilian states that most in 2011/12, the cost of production for typically produce the highest soybean soybeans was less than USD 9/bushel. When yields (such as Paraná), corn plantings have transportation to port is included, costs increased at the expense of soybeans in increase to USD 11/bushel. We expect this 2011/12. Although the increase in corn break-even cost to increase in 2012, which will plantings has not been enough to cause give CBOT soybean prices limited downside total soybean area to decline in year-on-year below the USD 11/bushel, based on our terms—in fact we expect the Brazilian forecast for the Brazilian real to remain strong soybean harvested area will reach a record during 1H 2012 before declining in 2H 2012. high in 2011/12—it does signify that the The demand profile for soy oil may potentially capacity to augment soybean supplies is diverge from soymeal in 2012 as the growth becoming increasingly constrained. As a in demand for biodiesel and emerging- result, a higher floor price will be needed market food consumption of soy oil outpaces to incentivise the increased production the growth in feed demand for soymeal. We necessary to replenish the global soybean believe soy oil prices are least exposed to the balance sheet in 2012/13. potential economic slowdown in 2012 due to We believe that in order to offer South their smaller exposure to EU and US markets, American farmers the profit margins required which account for one-quarter of total to further expand soybean planted area in demand as opposed to their more than 2012/13, CBOT soybean prices must remain one-third share of demand for soymeal. above USD 10/bushel in Q3 2012—which is This exposure can be further reduced to roughly the break-even cost needed to bring 18% if the relatively inelastic demand of on new soybean area in Brazil. Although Brazil biodiesel is excluded. is positioned as a more cost-efficient soybean In our low case, in which economic growth producer (particularly because their yields in developed economies significantly have been larger than those of US farmers underperforms that in emerging markets, soy for the past two seasons), this gap is quickly oil prices would perform comparatively well, closing. Rising land values, currency given their large exposure to emerging Figure 3.8: US soybean area planted and production, Figure 3.9: Corn and soybean area harvested in Brazil and 1998/99-2012/13f Argentina and ratio of soybean/corn area harvested, 1987/88-2011/12f 80 3.5 70 3.0 3.2 60 75 2.5 million hectares billion bushels 50 million acres 2.9 40 2.0 70 ratio 2.6 30 1.5 65 20 2.3 1.0 10 60 2.0 0 0.5 00/01 98/99 99/00 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12f 12/13f 87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 09/10 11/12f Area planted Production (RHS) Corn Soybeans Ratio soybean to corn area (RHS) Source: Rabobank, USDA, 2011 Source: Rabobank, USDA, 2011
Section 3 Agri Commodity Outlooks: Soybeans | 31 market economies. US soymeal demand is consumption of animal protein. Food inflation forecast to fall for a fifth consecutive year during 2011 has not reached the same levels to the lowest level since 1999/2000 due to seen in 2007 (in fact it has started to decline relatively flat year-on-year grain-consuming at the end of 2011) but remains historically animal units and the increased availability of elevated. China’s food inflation has largely DDGs. The volume of DDGs which substitutes been driven by pork prices, which reached total soymeal feed demand is estimated to record highs in 2011 as disease reduced be 20% to 30%. This implies that animal availability. This, in turn, gave farmers a price feed demand for US soymeal could have incentive to increase pork inventories, which potentially reached a record high in 2010/11 we view as supportive of China’s soybean were it not for the displacement by DDGs in import demand in 2012. The outlook for soy the feed ration. With our forecast for another oil demand growth is also uncertain for 2012 record-breaking year of ethanol production as crush margins have remained negative in 2011/12, soymeal demand will continue despite the government’s removal of price to decline. caps. Yet, we expect China’s year-on-year decline in soybean production in 2011/12 will The degree to which the soy oil share continue to be supportive of soybean import increases hinges largely on the outlook demand. The uncertainty lies in the extent to for biodiesel production (primarily in the which China’s demand will increase, which US) with significant downside, given the will largely depend on how the global likelihood that the USD 1/gallon tax incentive economic situation unfolds. will expire at the end of 2011, as well as upside risk if energy prices rise significantly in 2012. US biodiesel producers achieved record high profit margins in 2011, which are likely to deteriorate in 2012, causing year-on-year production decline to be the third highest on record. This will be more than offset by an increase in production in Brazil and Argentina, where mandates have been increased to B5 and B7, respectively. Brazil may potentially increase their blend requirements to B7 on the way to B20 by 2020. The largest downside price risk to soybeans will be the potential for China’s demand growth for soybeans to slow or decrease in 2012 should the global economic situation deteriorate, as in our low case, and threaten a slowdown to China’s economy. In 2007, when China’s food inflation skyrocketed, consumers responded by decreasing their per capitaFigure 3.10: Combined US, Brazil and Argentina soy oil exports Figure 3.11: CBOT soy oil share of crush margin,and industrial domestic use, 2001/02-2011/12f Jan 2002-Nov 2011 14 50 12 45 10million tonnes percent 8 40 6 35 4 30 2 0 25 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11f 11/12f 2002 2004 2005 2006 2007 2008 2009 2010 2011 Exports Industrial domestic useSource: Rabobank, USDA, 2011 Source: Rabobank, Bloomberg, 2011
32 | Rabobank Outlook 2012—Down, But Not OutPALM OILMDE-BURSA Q2’11 Q3’11 Q4’11f Q1’12f Q2’12f Q3’12f Q4’12f 12-month outlook from spotMYR/tonne 3,365 3,100 3,000 2,800 2,900 3,000 3,100 4,000 Low case Base case High case Exports of rapeseed Palm oil production La Niña strengthens 3,500 oil and soy oil grows 5% YOY in with a negativeMYR/tonne increase in 2011/12 2011/12 to more than impact to palm oil as opposed to our 50 million tonnes yields in Malaysia 3,000 forecast for a decline and Indonesia Global soy oil Weak economic exports fall to 9.3 Oil prices rise and 2,500 growth in China and million tonnes―the spur increased India causes their largest YOY decline biodiesel production import demand to since 2008/09 in the EU/US decline YOY 2,000 Global palm oil Global soybean 2010 2011 2012 Energy prices fall stocks-to-use production does and reduce biodiesel increase YOY in not increase 2% as demand to less than 2011/12 to 11.4% forecast for 2012/13 Historical Base case Low/high case Spot 12%-13% of global but remain vegetable oils historically low Source: Bloomberg, Rabobank Global production of palm oil is poised for alternative vegetable oils is forecast to decline another year of growth in 2011/12, surpassing in 2011/12, which will benefit palm oil as end 50 million tonnes for the first time in history, users seek lower cost alternatives to soy oil allowing prices to ease and spurring demand. and rapeseed oil. Although it is likely that While in isolation this would signify a bearish prices will be pressured in the short term, we price reaction, declining availability of expect the seasonal slowdown in palm oil alternative vegetable oils will continue to production during 1H 2012 to lead to a price create an elevated increase in global demand rebound in 2H 2012. for palm oil and prevent a significant build-up The biggest downside risk to our price of ending stocks. We expect the increase in forecast for palm oil in 2012 is the political risk palm oil production to be largely weighted at surrounding biodiesel production, which the beginning of the marketing year, driven accounts for approximately 12% to 13% of by harvest seasonality and the potential global vegetable oil consumption. Our low negative impact of La Niña. case prices assume a curtailment in mandates Malaysia’s palm oil production—which or financial incentives for biodiesel constitutes 44% of global exports—has production in major soy oil exporting outpaced its 12-month moving average since countries in 2012, which would increase March 2011, rising to the second-highest exportable surpluses of commodities such monthly level on record in October at as soy oil and rapeseed oil. On the other hand, 1.91 million tonnes. At the same time, stocks as vegetable oils have become increasingly rose to the fourth-highest level on record. correlated to oil prices in recent years, this Going forward, we expect that production link to energy markets also gives potential seasonality and detrimental weather could for price upside in 2012 in our high case. potentially cause monthly output to fall Global palm oil demand is largely driven by nearly 20% below the 12-month moving consumption in China and India where we average. This will be partially offset by the see a relatively smaller risk of economic elevated stock levels, but a larger-than- slowdown in 2012. China’s palm oil expected export pace or La Niña could give consumption has only shown year-on-year further upside potential to our price forecasts. declines in two of the past 15 years, with last Our base case prices factor in continued season marking the largest year-on-year strong global demand growth for vegetable decline over this time period. It also marked oils, which will be supportive of palm oil the slowest year-on-year percentage growth prices in 2012, driven by increased biodiesel in China’s total vegetable oil consumption in production, Chinese demand and weather 15 years, which we expect will result in a risks. Across the oilseed complex, we expect rebound in 2011/12. Food-price inflation has the oil share to perform particularly well in begun to decline in China, and crush margins 2012 as the demand profile for oils versus have become less negative. As in past years of meals diverges further. The output of reduced demand growth, we expect this will
Section 3 Agri Commodity Outlooks: Palm oil | 33Figure 3.12: Monthly Malaysia palm oil production and 12-month Figure 3.13: Palm oil and Brent crude oil prices and correlation,moving average, 2000-2011 2001-2011 2.0 0.5 160 0.4 140 1.8 0.3 120 1.6 0.2 100million tonnes correlation 1.4 prices 0.1 80 1.2 0.0 60 1.0 -0.1 40 0.8 -0.2 20 0.6 -0.3 0 2001 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 Correlation Brent crude oil price, USD/bbl (RHS) Monthly production 12-month moving average MDEX palm oil price, tens of USD/tonne (RHS)Source: MPOB, Bloomberg, Rabobank, 2011 Source: Rabobank, Bloomberg, 2011 cause China’s demand growth for palm oil to in 2011/12. However, relative to other agri rebound in 2011/12. Using a conservative 5% commodities, this demand profile is less at YOY increase, this would push China’s palm risk for a decline based on our economic oil imports to a record high of more than outlook for 2012. 6 million tonnes. However, there may be Palm oil prices will continue to be considerable upside to this assumption, underpinned by soy oil prices and, to a particularly as the last year-on-year decline, lesser extent, rapeseed oil prices. In our which occurred in 2001/02, was met with view, palm oil’s price discount relative to a more than 1 million tonne increase in soy oil will continue to find resistance above 2002/03—making even the USDA’s forecast USD 300/tonne—a level not surpassed since for a 7% YOY increase look conservative. We the global financial crisis in 2008. End-users see less risk of a slowdown in India’s palm oil were aggressive buyers of palm oil in 2011 as import demand as they have shifted to its discount dropped below USD 150/tonne. increasing reliance on palm oil in order to We believe this price relationship will persist fulfil vegetable oil demand, which is poised in 2012, keeping price movements in palm oil to expand to a record large 46% of the total dependent on developments in the broader in 2011/12. In our view, palm oil imports to oilseed and vegetable oil complex. India have a larger risk of falling short of expectations than those to China given the We expect that the year-on-year decline in relatively strong domestic oilseed production US soybean production in combination withFigure 3.14: Palm oil and soy oil prices and spread, 2000-2011 Figure 3.15: YOY change in global vegetable oil exports, 2000/01-2011/12f 1,600 5 1,400 4 1,200 3 million tonnes 1,000USD/tonne 800 2 600 1 400 0 200 0 -1 -200 -2 2011 2001 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11f 11/12f Soy oil premium to palm oil MDEX palm oil CBOT soy oil Palm oil Rapeseed oil Soy oilSource: Rabobank, Bloomberg, 2011 Source: USDA, Rabobank, 2011
34 | Rabobank Outlook 2012—Down, But Not Out increased biodiesel consumption in the US, Brazil and Argentina will reduce global exportable surpluses of soy oil by 6% in 2012. Rapeseed oil availability will also be reduced as global rapeseed production falls by more than 7%—a result of a second consecutive year-on-year decline in rapeseed yields. As these production shortfalls are met with continued demand growth, palm oil will account for a record large share of the world’s vegetable oil use in 2011/12 at more than 34%. As a result, we expect that the record large palm oil production will fail to create a substantial build-up in ending stocks and will require prices to remain elevated in 2012 in order to prevent demand from increasing above current expectations. We see the political uncertainty surrounding biodiesel production as the biggest downside risk to our price forecast, particularly the USD 1/gallon tax credit for US producers which is set to expire at the end of 2011. Weather poses the largest upside risk to our price forecast as a strengthening La Niña could reduce palm oil production in the coming months more than expected or cause South America’s soybean yields to fall below trendline.
Section 3 Agri Commodity Outlooks: Sugar | 35SUGARICE Q2’11 Q3’11 Q4’11f Q1’12f Q2’12f Q3’12f Q4’12f 12-month outlook from spotUSc/lb 24 29 24.5 23.5 23 22 22 35 Low case Base case High case 30 The 2012 Brazilian Larger Northern New season crop defies 25 Centre/South cane Hemisphere and expectations; lower- crush exceeds Indian crops shift than-expected Thai, expectations: larger Indian or BrazilianUSc/lb 20 globe into a surplus, surplus, weaker prices supplies cause a smaller weighing on surplus/4th consecutive 15 international prices International demand deficit season 10 expectations from Ethanol demand Policy action supports China are not met: market; Indian or EU in Brazil and tight 5 larger domestic crop governments allow suffices, government- inventories temper downside bias smaller exports than 0 buying wanes expected 2010 2011 2012 Deteriorating economic Demand is robust as Investor confidence conditions result in prices fall and users returns and the sugar investor liquidation restock market is viewed as Historical Base case Low/high case Spot in futures markets undervalued, leading to buying Source: Bloomberg, Rabobank We forecast lower international sugar prices in ICE #11 contract averaged USc 28/pound in 2012 as the market shifts into a surplus for the 2009/10—resulted in a stock drawdown and first time in three seasons. With global ending pushed users to rely on inventories and hand- stocks expected to increase above the 10-year to-mouth buying. The pent-up demand average for the first time since 2008/09, we surfaced as prices fell in late 2011, and we anticipate NY raw sugar prices will ease and expect further demand increases in 2012. reach an average level of USc 0.22/pound in In our view, the dominant factor in the sugar Q4. Even with the 6 million tonne surplus market in 2012 will be the improved supply forecast for 2011/12, we expect volatility to situation, a function of larger crops outside remain elevated and the current risk premium of Brazil, and likely a reaction to higher to linger until mid-year when crop sizes are prices of the past two seasons. Our forecast more certain. In our view, the forecast for total global sugar production in 2011/12 increased supply will result in lower prices, is 174.5 million tonnes, up 5% from the but a number of supportive factors will previous season and the fourth consecutive prevent the collapse of values. Increased increase. Better beet crops in the EU and demand from global importers and the Russia, as well as increased production in ethanol industry in Brazil are anticipated to be Thailand and India, resulted in 6.2 million major supportive factors in the new season. more tonnes of sugar, enough to offset the Also, the forecast surplus will not be enough lack of growth in Brazilian production year- to replenish the 19.8 million tonnes of deficit on-year. With the largest surplus forecast for of the past three seasons, and while the 2011/12 since 2006/07, when prices averaged stocks-to-use ratio is expected to increase in USc 10.3/pound, we expect prices on the NY 2011/12, it is forecast to be five percentage markets will struggle to remain above the points below the 10-year average. USc 25/pound level in 2012,assuming benign Given our bias for easing sugar prices in 2012, weather conditions and no major negative we expect the buying support to grow and weather events. remain resilient even in the case of a The demand for ethanol in Brazil and the widespread economic downturn. Our forecast competition between Brazilian drivers and demand growth in 2011/12 of 1.6% is a global sugar importers is expected to be a function of lower prices encouraging buying major factor in downside support for the and is up from the 0.8% increase in the sugar price in 2012. The size of the 2012 previous season. When the sugar market went Brazilian cane crop is the most important into deficit from 2008/09 to 2010/11, annual variable in the equation of how much sugar demand growth averaged only 0.3%. We will be available for export and how much foresee the need for many international will be available for biofuel use, but the prices buyers to come on the market in 2012 to of the products will determine the share of restock diminished inventories. In our view, the cane crop devoted to each. Our early the elevated prices of the past season—the projections suggest the Centre/South cane
36 | Rabobank Outlook 2012—Down, But Not Out harvest could be slightly lower than likely be another supportive demand-side 500 million tonnes, up from the 2011 estimate factor in 2012. In 2011/12, Chinese sugar of 490 million tonnes, but still below the production is forecast to increase 9% from record of 556 million tonnes reached in the previous season on better weather 2010/11. The early projections of cane supply and an increase in planted area. Domestic suggest the market for ethanol will be tight consumption is forecast to increase 2.3% in and that there will be strong competition 2011/12 with the domestic crop representing between the two products. 81% of total demand. Depleted stocks and the expected domestic deficit of 2.0 million- How much of the cane crop will be used 2.5 million tonnes mean that imports are to produce ethanol is a function of the forecast to rise to 3 million tonnes, up from international price of sugar and the USD/BRL 2.8 million the previous season. exchange rate. If the ICE #11 contract falls too far, mills in Brazil will focus on ethanol instead In our base case prices, we see strong support of sugar, assuming a fixed currency exchange for raw sugar values, given the expectations rate. We estimate the current price level for for demand growth and the modest build-up mills to change from sugar production to of stocks. We forecast prices to average ethanol production at near USc 22/pound. USc 23.5/pound in 2011/12, a historically In the medium term, we assume this support high price, but down USc 4.5/pound from the level will fluctuate between USc 18/pound previous season’s average. We see downside and USc 22/pound. In our view, there will risk bias being moderated by demand be strong support in the international sugar expectations and the increasing competition price at levels that encourage ethanol of ethanol for cane sugar in Brazil. production over sugar production. Given our In our high case, better economic growth outlook on ethanol prices, we forecast this and a weaker devaluation of the US dollar support level to be near our USc 22/pound will add further support for the sugar market. price forecast for raw sugar. Looking further With a stronger US dollar, the value of sugar out the curve, the growing flex-fuel fleet in in Brazilian reais will fall, meaning that Brazil and diminished investment in sugar international futures contracts—all priced in capacity will likely keep the domestic market US dollars—will have to increase to offset the tight. The government has implemented falls in real value for Brazilian mills. Speculator some legislation to support ethanol output interest in sugar could also add a supportive and has threatened more policy measures, element if economic growth expectations are but in our view, the main deciding factor in revised higher; the speculator net long the production of ethanol will be the price positions were heavily liquidated in 2H due to of sugar on the NY market. A shortfall of sugar heightened market uncertainty. Speculators for ethanol on the Brazilian market due to may increase the net long position if bullish elevated sugar prices may result in further economic growth triggers a risk-on corn ethanol imports from the US as in 2011. environment but we expect this to be Chinese sugar inventories are at very low tempered by the better supply expected levels currently, and government-buying will in the new season. Figure 3.16: Global sugar production and surplus/deficit, Figure 3.17: Brazilian ethanol and sugar price inter-relationship 2000/01-2011/12f 10 200 26 180 5 160 24 140 NY sugar prices 22 million tonnes 0 120 raw value 100 20 -5 80 60 18 -10 40 16 20 -15 0 14 0.90 1.00 1.10 1.20 1.30 1.40 2010/11 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2011/12f Anhydrous ethanol price (BRL/L) Sugar equiv. (BRL1.60/USD) Sugar equiv. (BRL1.75/USD) Surplus/deficit Production Sugar equiv. (BRL1.90/USD) Source: Rabobank, FO Licht, 2011 Source: Rabobank, Bloomberg, 2011
Section 3 Agri Commodity Outlooks: Sugar | 37In the sugar futures markets, prices have beengreatly impacted by macro concerns in 2011,and this is expected to remain a major pricedriver in 2012. If further negative macroevents occur and our low case of risk-off anda higher US dollar becomes reality, sugarprices could over-correct as they did inMay 2010 when they fell to USc 13.67/pound.The speculator net long position, while lowrelative to historic averages, could still beliquidated further, putting major pressureon prices. A stronger US dollar environmentwould also be unfriendly for internationalprices. However, even with negativeconditions, the lower prices would likelygenerate increased buying support.We anticipate high volatility in 2012, whichwill partially be a function of heightenedpolitical risk which remains a dominantfeature of the global sugar market. While weforecast a larger crop for India in 2012 and thepotential for 4 million tonnes of exports, theIndian government policy of allowing exportsonly when domestic supply is assured, andgenerally in incremental amounts, increasesuncertainty on the global market. The EU isalso expected to influence the internationalmarket with government action as the blocmay face a shortage of sugar in 2012 withimports unlikely to reach demandexpectations. The domestic EU crop in2011/12 is forecast at 17.4 million tonnes, upfrom 15.1 million tonnes the previous season,but this additional supply is out of quotaand cannot therefore be used for humanconsumption. Given the supply issues theEU experienced in 2011, we anticipate policyaction if a shortfall is expected, but what theEU will do, and to what extent, is unknown. Figure 3.18: No. 11 Sugar managed money net long position and price, 2000/01-2011/12f 250 40 35 200 30 thousand contracts 150 25 USc/lb 100 20 15 50 10 0 5 -50 0 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Managed money net long position No. 11 Sugar price (RHS) Source: Rabobank, CFTC, Bloomberg, 2011
38 | Rabobank Outlook 2012—Down, But Not OutCOFFEEICE Q2’11 Q3’11 Q4’11f Q1’12f Q2’12f Q3’12f Q4’12f 12-month outlook from spotUSc/lb 271 257 230 220 200 180 170 350 300 Low case Base case High case Better-than-expected A large 2012 Brazilian Weather conditions 250 2011/12 Colombian crop shifts the globe affect the Brazilian crop and increased back to surplus and crop, exacerbatingUSc/lb 200 2012/13 production alleviates tight supply tight supply situation 150 build Arabica supply Demand growth Low stock levels 100 Recession weakens continues at 2.5%, aggravate any consumption growth supporting values production disruption, 50 in emerging markets; encouraging demand weakens, Last year’s elevated speculative buying 0 production increases prices support 2010 2011 2012 increased marginal The Vietnamese Recession fears production growth government enacts a prompt a speculator in the medium term buying programme to Historical Base case Low/high case Spot sell-off, resulting in support Robusta prices futures liquidation Source: Bloomberg, Rabobank Coffee prices are forecast to fall in 2012 due anticipate Arabica prices to revert to 2009 to the large harvests expected in Brazil and levels in 2012, due to the risks of production Vietnam, but diminished stocks will keep risks and low inventories. However, it is our view skewed to the upside. Unlike after past coffee that the elevated prices from 2010/11 will price rallies, we do not foresee a collapse of have resulted in increasing marginal gains in prices as it will take a couple of seasons to production and helping lift stock levels. replenish stocks and reverse the decade-long Consequently, we expect the 2011/12 trend of falling stock levels. The stocks-to-use season—a low season for the Brazilian crop, ratio has fallen from 44% in 2002/03—the but the largest off-season crop ever—to be a height of the coffee crisis—to our forecast nadir in the medium term for the stocks-to- 18% in 2011/12, the lowest on record. use ratio. While increases in planted area will Strong global demand is also supportive only yield output growth in three to four of prices and continues to grow at a brisk years’ time, the better prices have also 2.5% annually. encouraged better husbandry as well as increased use of inputs, both of which We anticipate the 2011/12 coffee season will are supportive for increasing output in be characterised by razor-thin stocks and high the short term. risks, but in our view this is a turning point in a decade-long trend of shrinking supply. Even Brazilian production has increased notably in with a large Brazilian crop, we do not the past as a result of higher prices, and we Figure 3.19: Global coffee ending stock and stocks-to-use, Figure 3.20: Coffee inventories and NY futures price, 2000/01-2011/12f Jul 1995-Jul 2011 60 50 8 320 45 50 7 280 40 6 240 35 40 million bags million bags 30 5 200 percent USc/lb 30 25 4 160 20 20 3 120 15 2 80 10 10 5 1 40 0 0 0 0 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 2011 2001 10/11f 11/12f 2007 2008 2009 2010 1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 2006 Note: 1 bag=60 kilogrammes Note: 1 bag=60 kilogrammes ICE Coffee stocks US green coffee stocks Ending stocks Stocks-to-use (RHS) NY front month coffee price (RHS) Source: Rabobank, 2011 Source: Bloomberg, Rabobank, 2011
Section 3 Agri Commodity Outlooks: Coffee | 39anticipate the country will respond to current also anticipate consumption growth in origininternational values with a jump in output. countries to remain robust. Global coffeeThe Brazilian crop has increased 80% since demand is forecast to increase 2.4% in1981 while area has actually decreased 12.5%. 2011/12, up from 2.1% the previous seasonHowever, it has not been a uniform fall as and flat with the 10-year average of 2.5%. Inhigher coffee prices have led to increased our view, coffee demand will be supportedarea harvested. The coffee rally of 1986 by lower prices in 2012 and increases inresulted in a harvest area increase of 17% consumption at origin, especially in Brazil.three seasons later, while four years after the Coffee consumption in Brazil has been1997 rally, harvest area in the country had growing at a 3.9% annual average ingrown 14%. the past 10 seasons, and we foresee use expanding by 4.1% in 2012. Based on ourArabica production has been increasing models, Brazil will replace the US as theslower than coffee demand growth. Global largest consumer of coffee in five years.production for the variety has increased only11% from 2001/02 to 2011/12, while total While coffee is not an essential componentcoffee demand has increased 29% in the of the human diet (though this is subject tosame period. The difference has been made debate), the income elasticity of demand forup by increased Robusta production and the product is low; during the financial crisisstock drawdown. Reduced production from of 2007-2009 the demand for coffeeColombia in the past three seasons has continued to grow, albeit at a slightly slowerexacerbated the low Arabica stocks situation pace. Coffee imports and purchases wereand has been a catalyst for the 2010/11 price skewed during the crisis as companies drewrally. In 2012, Arabica supply will be more down stocks and consumers altered buyingabundant because of the larger forecast habits, but the amount of coffee consumedBrazilian crop, but as this supply will not come increased 2.2% and 1.1% in 2007/08 andon-line until the start of May, volatility and risk 2008/09, respectively. However, this growthremains elevated. Our early projection for the is down from the previous five-year average2012 Brazilian crop is 59 million 60kg bags, of 3.2%. The resilience of coffee demand was46 million bags of which is expected to be illustrated during the severe recession ofArabica, and 7 million bags washed. The 2007-2009, and we assume this robustcoming Brazilian crop is bearish given its size, demand will remain even in the face ofbut the previous record harvest in 2010 weaker and uncertain economic conditionsoccurred as prices were rallying to record in 2012. Given the resilience of consumption,highs. In our view, the difference is that higher we expect prices in 2012 to be determinedprices of the past season will result in larger much more by supply-side dynamics.increases in production in other producer Arabica prices are influenced by thecountries in 2012. movements in the US dollar and the BrazilianOur base case of slowing economic growth real and our expectations of a weaker USin the US and the EU is not expected to have dollar in 2012 are mildly friendly for coffeea measurable impact on coffee demand; we prices. A falling US dollar is supportive for Figure 3.21: Coffee currencies and NY futures price, Apr 2010-Oct 2011 0.058 .70 330 0.057 .68 310 0.056 .66 290 0.055 .64 270 0.054 .62 250 0.053 .60 230 0.052 .58 210 0.051 .56 190 0.050 .54 170 0.049 .52 150 0.048 .50 130 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Apr-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 BRL/USD COP/USD NY front month coffee (USc/lb) Source: Bloomberg, Rabobank, 2011
40 | Rabobank Outlook 2012—Down, But Not Out coffee futures prices in NY as it means lower costs for international buyers, promoting sales, and a falling dollar generally encourages fund-buying in the commodity markets. Speculators use the agri complex as both a hedge against the falling US currency and a supporting factor. The Brazilian real is expected to appreciate in 2012, and this generally supports the Arabica market. As Brazil accounts for approximately 40% of total global Arabica output and half of total Arabica exports, moves in the Brazilian currency are an important factor in coffee prices, on both the ICE and BMF Arabica future exchanges. A stronger Brazilian real is supportive for Arabica prices as growers in Brazil receive less value for the commodity and are not inclined to sell. The relationship between the currency and prices on the terminal market breaks down when strong fundamental indicators move the market. We anticipate currency moves to be supportive for the coffee markets in 2012, but currency markets will likely be overshadowed by fundamental factors as supply is very tight and production risks are high.
Section 3 Agri Commodity Outlooks: Cocoa | 41COCOAICE Q2’11 Q3’11 Q4’11f Q1’12f Q2’12f Q3’12f Q4’12f 12-month outlook from spotUSD/tonne 3,042 2,969 2,400 2,350 2,450 2,350 2,300 3,500 3,000 Low case Base case High case Larger-than-expected Record carry-over from New government 2,500 crops from West Africa 2010/11 season; large buyer established add to high buffer product stocks in Ivory Coast,USD/tonne 2,000 stocks, pushing prices pressure terminal compromising supply lower markets certainty 1,500 Economic contraction Emerging-market Increased chocolate 1,000 results in lower demand for powder and cocoa-based chocolate and cocoa- products underpins product consumption 500 based production, the entire complex exceeds forecasts, crimping demand causing inventory 0 US/EU chocolate drawdown Better supply consumption remains 2010 2011 2012 expectations liquidate stagnant with West African short large commercial long lacklustre performance crops diminished by Historical Base case Low/high case Spot position in terminal in cocoa butter market detrimental weather, markets pushing market into large deficit Source: Bloomberg, Rabobank Abundant supply of cocoa beans and better supplements. The growth in demand for expectations for the 2011/12 crops are cocoa powder products is expected to come expected to lead prices lower in 2012. This from emerging markets. downside, as prices pass two-year lows, There is no consistent pattern for cocoa bean follows concerns about West African terminal markets in a recession since supply output dwindling. dynamics are generally more important for The cocoa bean market is vulnerable prices. During the 2007-2009 recession, cocoa to economic contraction as chocolate prices on the ICE exchange in the US ended confectionery is subject to demand higher. However, during this period cocoa destruction when incomes are under grindings fell as many chocolate makers pressure. Given the expectations of weak decreased the size of consumer products or economic growth in the EU and the US, we used substitutes for cocoa. Some of the foresee consumer chocolate demand in these decrease in grindings can also be attributed regions to be flat in 2012. However, the cocoa to manufacturers drawing down stocks. bean market is somewhat insulated from Looking to 2012, we anticipate EU and US weakness in chocolate consumption due to grindings falling from 2011 levels, but total the increasing demand for cocoa powder, global grindings to increase 3.7% in 2011/12, which is found in a variety of products, from driven mostly by the powder market. chocolate drinks and ice cream to health Figure 3.22: Cocoa grindings and YOY GDP change in mature markets, Jun 2000-Sep 2011 550 10 8 500 6 thousand tonnes 4 450 2 percent 0 400 -2 -4 350 -6 -8 300 -10 Mar-01 Dec-01 Sep-11 Jun-00 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Combined US and EU grindings EU (RHS) US (RHS) Source: Rabobank, IMF, NCA, ECA, 2011
42 | Rabobank Outlook 2012—Down, But Not Out The cocoa bean market could be impacted capacity by the major producing regions was in 2012 by policy moves in Ivory Coast as leading to a global deficit. The average front- the new government may play a larger role month price in NY between 2004 and 2007 in the procurement and trade of cocoa. The was USD 1,591/tonne while between 2008 government announced in early November and 2011 it was USD 2,826/tonne, 78% higher. 2011 that farmers will receive a guaranteed Concerns that farmers in West Africa would cocoa bean price of between 50% and 60% abandon plantations or switch production to of the international terminal price. This is rubber supported terminal markets. It seems not expected to have a significant impact as the high prices have worked; helped by grower prices are already at or above these supportive weather, Ivory Coast production levels. The Ivory Coast government has stated reached a record in 2010/11, and government that the export tax is capped at 22%, down officials say a large crop is also expected for from a 25.3% average in 2008/09, and the 2011/12. Even with the positive impacts of lower tax will allow growers to realise greater La Niña, production would not reach such returns. The new government has outlined levels if plantations had been abandoned a plan in which exporters must pre-purchase or switched to rubber. Price signals have beans before the harvest begins as a way increased output, and alongside supportive to have funds to guarantee the farmer price. weather, this is a bearish outcome in a world The uncertainty about the government’s eating only marginally more chocolate. plans is impacting the market, and since the country accounts for one-third of global output, unpredictable government interventions will inject volatility into the international terminal markets. Due to a large carry-over of cocoa beans from 2010/11 and sizeable crops expected for the 2011/12 main harvest, the supply of cocoa beans looks bearish in the short term. With flat chocolate consumption, we anticipate the butter ratio, which in the EU fell to below 1.0 in November, to continue to remain under pressure in 2012. Powder ratios are expected to continue to drive the markets. This dynamic has been the focal point of the cocoa market in the past year and we expect this to continue in early 2012. In our view, the price of cocoa beans rose to a new norm in the past four years, as the market became concerned that underinvestment in Figure 3.23: NY Cocoa prices, Nov 2000-Nov 2011 Figure 3.24: NY Cocoa commercial long position and price, 1995-2011 4,000 160 4,000 3,500 140 3,500 3,000 120 3,000 thousand contracts USD/tonne 100 2,500 USD/tonne 2,500 2,000 80 2,000 60 1,500 1,500 40 1,000 1,000 20 500 500 2011 2001 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 0 2011 2001 1995 1997 1999 2003 2005 2007 2009 NY cocoa price 4-year average Commercial long position NY front month cocoa price (RHS) Source: Bloomberg, Rabobank, 2011 Source: Rabobank, CFTC, 2011
Section 3 Agri Commodity Outlooks: Cotton | 43COTTONICE Q2’11 Q3’11 Q4’11f Q1’12f Q2’12f Q3’12f Q4’12f 12-month outlook from spotUSc/lb 168 108 95 85 85 80 80 200 180 Low case Base case High case 160 Demand continues to Better 2011 crops Better-than-expected 140 weaken for cotton as increase supply and economic growth 120 garment sales fall due weigh on prices spurs demandUSc/lb to economic 100 contraction Lower international Lower prices result in 80 prices support lower-than-expected Higher USD reduces demand growth Southern Hemisphere 60 apparel imports into planting, shrinking 40 the US, cutting cotton Planted area growth supply supporting 20 consumption rates continues in 2012 with prices after 2H 2012 prices still high relative 0 Further risk-off prompts to historic averages Planting in the US is 2010 2011 2012 more investor unable to reach liquidation in NY estimates due to futures market; current continued drought Historical Base case Low/high case Spot 33,157 longs = 13% in Texas open interest Source: Bloomberg, Rabobank In 2012, we expect the global cotton industry synthetic fibre will come under the same to be under pressure and prices to fall due to pressure as cotton as the apparel industry the largest global crop ever and stagnant faces reduced demand growth. demand. In our view, downside price We forecast global cotton consumption in movements in 2012 will be tempered in 2011/12 to increase 1.5% while production Q1 by the battle for acres in the Northern for the 2011/12 season is expected to be Hemisphere growing regions and concerns 6.6% higher than the previous season. The about the impact of dryness on US plantings. largest contributor to demand growth is As a consumer good and not a food product, expected to be emerging markets, especially cotton is more susceptible to economic China. Apparel demand in China has not downturns than the rest of the agri complex, slowed as it has in the US; while the Chinese and this was evident in price movements economy cooled in 2011, buyers purchased during the past recessions. In our view, cotton a record amount of textiles. Growth is demand will be squeezed on both sides in forecast to slow further in 2012 in China, 2012, as high prices for the fibre in the past but we anticipate the consumption of season resulted in higher priced yarn and apparel will remain strong. Although global textiles; high unemployment and concerns demand for cotton and textiles is being about household incomes have also resulted increasingly driven by China, the country in increasingly cost-conscious consumers. cannot absorb all of the fibre. We expect Garments made from higher priced cotton prices will have to move lower in order to are reaching retail outlets as the growth in the stimulate demand outside of China. US and EU economies remains anaemic and The US drought, which began in consumer confidence low. Prices of apparel October 2010 and continues today, has in the US jumped, with year-on-year increases devastated cotton production in Texas and the highest in two decades. Given the may have a lasting impact as spring plantings stable prices in the months leading up to could be threatened. The drought is likely November 2011, higher priced textiles to have reduced the US 2010/11 cotton will remain the norm for much of the first production estimate by 2 million bales, or half of 2012 and will continue to impede 11%. The current La Niña pattern is forecast to demand growth. remain in place for the second winter in a row. The increased use of synthetic fibres worsens A La Niña pattern generally results in lower the cotton outlook further. In the 2010/11 precipitation in the Texas/Oklahoma region. season, when cotton prices reached all-time Together the two states accounted for 54% highs, many textile producers blended more of total acreage planted in 2011. The National synthetic fibres, reducing the demand for Oceanic and Atmospheric Administration of natural cotton. Synthetic fibre production in the US projects the main cotton growing China, the largest producer, is forecast to have region to remain dryer and warmer than reached a record high in 2011. In 2012, average. Time remains for the drought to
44 | Rabobank Outlook 2012—Down, But Not Out Figure 3.25: Cotton and S&P GSCI Agriculture Index price performance in recessions, 1970-2009 2.0 1.8 Indexed to start of recession 1.6 1.4 1.2 1.0 0.8 0.6 0.4 1981 1991 1970 1973 1975 1982 2007 2008 ICE cotton front month S&P agri index Source: Bloomberg, Rabobank, MBER, 2011 break before plantings, but the weather The cotton price on the NY market will projections for the 2012 US cotton crop have to strike a balance between promoting are bullish. consumption outside of China and encouraging enough US growers to plant Cotton will compete with the other row in the spring of 2012. Given these dynamics, crops in 2012 for acres, and as prices in the we expect Q1 2012 to be the most supported agri complex are elevated, we do not expect period for cotton prices, but if benign weather a collapse of cotton values. US farmers supports the US crop outlook, continued increased planted area 34% for the 2011/12 downside is expected. Any correction in the season as prices reached new nominal cotton price could be amplified, depending records. A high abandonment rate of on the state of the global economy. 33% in the season was the result of the devastating drought. For 2012, our early projections are for US farmers to decrease planting to 11 million acres. We assume that the weather conditions will improve in Texas, allowing for a more average abandonment rate and yield. Given this, 2012 output is expected to exceed the 2011 harvest. Figure 3.26: Global and Chinese cotton consumption, Figure 3.27: World cotton production and surplus/deficit, 1971/72-2011/12f 1991/92-2011/12f 160 60 15 130 140 10 50 120 120 5 40 110 million bales million bales million bales million bales 100 0 80 30 100 -5 60 20 90 -10 40 10 -15 80 20 0 0 -20 70 00/01 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11f 11/12f 1971/72 1976/77 1981/82 1986/87 1991/92 1996/97 2001/02 2006/07 2011/12f World China (RHS) Surplus/deficit Production (RHS) Source: Rabobank, USDA, 2011 Source: Rabobank, USDA, 2011
Section 3 Agri Commodity Outlooks: Livestock | 45LIVESTOCKLIVE CATTLE LEAN HOGS 12-month outlook from spot 12-month outlook from spotLow case Base case High case Low case Base case High caseUSD strengthens Feedlot inventories La Niña persists Chinese Chinese reduce Further diseaseand US export fall on tight feeder past the expected substantially reduce demand due to outbreaks in Chinademand falters supply June end imports on the back disease recovery and result in significant of strong domestic higher domestic domestic herdPacker export profits Packers continue to USD weakens production and a production liquidationsfall and with make positive profits further, resulting stronger USDnegative margins driven by strong in stronger-than- Continuing economic Major importers’they reduce export demand expected export Bank of Japan uncertainty results currenciespurchases growth form intervenes to in USD weakness; appreciate against USD remains weak emerging markets weaken the yen exports remain at the USDBrazilian and against the major 1.68 million tonnesAustralian currencies importers Feeder cattle price Large fall in the corn Corn strengthens,weaken against the skyrockets on price sees producers Corn prices remain resulting inUSD and major beef persistent drought increase farrowings under USD 6.50/lb producers scalingimporting currencies conditions and raise herd and above USD 6/lb back production inventories We expect US cattle prices to continue their in the US, further squeezing packer margins. strong performance in 2012 albeit with a Given the poor calving numbers in 2011, brief plateau in Q1 as record feedlot the shortage of feeder cattle is not expected inventories reach the market. However, to be alleviated in 2012. Packers have incurred tight feeder supply should bias price negative margins on domestically sold beef upwards from spring onward. in 2011 but have been able to at least partially recoup losses on strong Asian exports at Lean hog prices are expected to flatten profitable levels. US beef exports jumped in 2012 as US and global supply increases strongly in 2011, up over 25% YOY and up but upside risks remain with strong Asian 9.12% on the five-year average. Our forecast demand and risk of disease in the Chinese of a weakening US dollar and relatively domestic herd. Strong demand from strong Australian and Brazilian currencies, emerging-market economies is expected two of the US’s major competitors in the to provide robust support for US livestock beef export market, drive our forecast of markets in 2012. improving US beef demand from foreign Live cattle markets. However, this will also force US US live cattle prices are expected to fall in packers to reduce imports of foreign beef. Q1 2012 from their November 2011 highs With the anticipated relaxation of import as record numbers of cattle on feed outstrip restrictions by Japan and the recent demand in the near term. A record drought ratification of the US–Korea Free Trade in the southern US has left producers with a Agreement, we see both improved market severe shortage of pasture and resulted in access and export demand providing strong higher placements of feeder cattle this year, support for US beef prices in 2012. However, at lighter weights than normal. The this upside will be somewhat tempered if September placement of cattle under economic conditions deteriorate much 600 pounds was 685,000 head, compared further and emerging-market economy with 510,000 head in August 2010—a 34% growth slows. increase—while in October 2011, the year- on-year spread narrowed to an 11% increase. These restrictions currently require US beef We anticipate the lower weights and increase cattle to be 20 months of age or younger in placements will result in a large amount at the time of slaughter, but under new of live cattle being brought to market in the proposals, the maximum import age is likely early months of 2012 as cattle placed into to be increased to 30 months. The catalyst for feedlots in July, August and September of the relaxation of restrictions has been the 2011 work their way through the system. decline in Japan’s domestic beef production following the tsunami in March 2011 and Tight supplies of feeder cattle mean that live resulting radioactive contamination in cattle prices in Q2 2012 are expected to rise the Japanese agri complex. With imports
46 | Rabobank Outlook 2012—Down, But Not Out of 351 million pounds, Japan was the third- Lean hogs largest export market for US beef in 2010. Momentum in the US lean hog market is However, their imports in 2010 were 61.7% expected to wane in 2012 as producers below where they were in 2003 at 918 million increase farrowing to meet demand and pounds, before restrictions were imposed. Chinese import growth slows. This is coming Japan’s relaxation of the age restriction on off the back of strong bullish momentum in US beef opens the market to heavier carcass the US lean hog market in 2011. US herd weights. If the yen continues its strong inventories in 2011 rose by 2.5% in Q3 from performance against the US dollar, we expect the traditional seasonal low at the end of Q1; there to be strong upside potential for US this is compared with the Q3 2010 rise of beef exports into Japan in 2012. 1.6%. Just as the cattle market benefited from a low US dollar and high export demand, so We expect to see the beef cut market too has the pork industry. Strong export continue to exhibit a large spread between demand in 2011 has helped maintain higher Choice and Select cuts in 2012 as seen in the domestic prices, a situation that will likely latter half of 2011. The catalyst for this spread continue with a weak US dollar in 2012. movement has been the entry of Walmart into the Choice beef market. Walmart has Pork producers and processors have been long been a retailer of Select cuts, the lowest challenged with slowing margin growth due of three USDA grades of beef at the retail level to the upward shift in corn prices. CBOT corn in the US. However, in an effort to increase prices averaged 61% higher in 2011 than in sales and attract a higher value customer, the 2010. As a percentage of total feed cost in the world’s largest retailer has added Choice cuts, raising of US lean hogs, corn has risen from the midlevel retail cut, to their meat aisle. 49.6% to 54.6% due to both the higher corn This move has increased the spread between cost and the 11.8% fall in the price of soymeal. Choice and Select cuts to a full USD 19/cwt Using a 3:1 feed conversion ratio and from a pre-Walmart entry spread of a assuming a 75% corn feed mix, the cost of mere USD 3/cwt. Over 50% of Walmart’s adding one pound to a hog under the current 260 billion dollar income came from grocery April 2012 live hog crush is USD 0.42/pound. sales in 2010. Given Walmart’s market share, While US breeding stocks increased 1.3% in packers have been bidding up the price of November, eventual year-on-year expansion live cattle, despite negative domestic margins, is uncertain due to the relatively high price in an effort to capture long-term business of corn. Current lean hog packer margins for from the new player in the Choice cut space. December 2011-April 2012 indicate a profit We see the entry of such a retailer into the of USD 8.58/cwt, a USD 10.27/cwt turnaround Choice cut market as being supportive of from the same crush last year. In the prices for 2012 and expect the spread December-April crush, corn accounts for between wholesale boxed Choice cuts 55% of total feed cost, a rise of 5% from the and wholesale boxed Select cuts to remain same crush 12 months ago. November 2010 stable at current levels. saw producers working with a corn cost of USD 60.01/head, which rose to Figure 3.28: US beef prices and inflation, Jan 2004-Jul 2011 Figure 3.29: US boxed beef cutout value 600 lbs-900 lbs spread, Nov 2009-Nov 2011 200 6 200 180 5 190 160 4 140 180 3 index points 120 170 USD/cwt 2 USD/cwt 100 160 1 80 0 150 60 40 -1 140 20 -2 130 0 -3 120 Feb-11 Jul-11 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Boxed beef Choice cut US CPI (RHS) Select cut spot price Choice cut spot price Source: Rabobank, USDA, Bloomberg, 2011 Source: Rabobank, USDA, Bloomberg, 2011
Section 3 Agri Commodity Outlooks: Livestock | 47 USD 67.14/head in November 2011, though Japan, the largest export market for US pork, the increase in the price of lean hogs more increased demand by 14% for the period of than offset this. This upward movement in the January to October compared to the same lean hog market has been driven, to a large period in 2010. The increase in demand was extent, by strong export demand. The January driven by the appreciation of the yen against to September export figures released by the the US dollar. Pork export demand is USDA report pork exports at 1.68 million increasingly exposed to currency fluctuations tonnes. This equals a 288 thousand tonne as the Bank of Japan continues to intervene in increase year-on-year or a 20.6% increase the foreign exchange market and states that in volume and a 40.5% increase in value. it will continue to do so in order to support domestic exports on a lower yen. There is a risk of weaker pork exports into China in 2012 as domestic producers recover from disease outbreaks and scale up production. This increase in production has already been seen to a degree, as Chinese producers reacted to a 139% price rise in the five months to July 2011. There was widespread liquidation of the Chinese domestic hog herd in 2011 due to disease and this resulted in a larger-than-expected shortfall in domestic production. In the wake of this shortage, imports of US pork in China rose 67.5% in the first three quarters of 2011, a figure that rises to 376% if Taiwan and Hong Kong numbers are excluded. Unsurprisingly, the sharp increase in prices has since resulted in increased herd-building and increases in animals brought to market, resulting in a fall from the June high of CNY 19.8/pound. With pork considered to be of national strategic importance to China, the government has initiated large campaigns to reduce the outbreaks of foot-and-mouth disease and is simultaneously seeking to modernise the production chain, with the ultimate goal of reaching self-sufficiency.Figure 3.30: Chinese pork spot prices, Jan 2009-Nov 2011 Figure 3.31: China’s pork imports volume, Jan 2010-Oct 2011 21 70 19 17 60 thousand tonnes 15 50CNY/kg 13 40 11 30 9 20 7 10 5 0 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecNote: Spot price is as reported on the Jilin Market 3-year range 2011 2010 3-year averageSource: Rabobank, Bloomberg, 2011 Source: Rabobank, Bloomberg, 2011