Agricultural commodities face a “multi-year structural repricing higher”, spurred by China’s growing import needs and increased biofuel demand, besides by a broader fillips to the raw materials sector, Goldman Sachs said.
The bank – in details of a briefing earlier this week which forecast a “structural bull market on par with the 2000s” for commodities – said that the “remarkable turnaround” in ag prices this year would be followed by further strength.
China will be a key driver, with Goldman seeing it as “starting a multi-year import surge”, spurred not just by restocking after the country’s trade war with the US, but by the feed needs of its expanding hog herd.
“We see total Chinese corn imports rising to 33m tonnes in 2021, and up to 55m tonnes by 2023,” the bank said, amid a market focus on this trade.
While the US Department of Agriculture earlier this month raised by 6.0m tonnes, to 13.0m tonnes, its forecast for China’s corn imports for 2020-21, many commentators believe a higher figure is likely.
‘Structural repricing higher’
The bank forecast too a “return of a US-led biofuel demand pull in coming years”, although this time led by biodiesel, “which our agribusiness analysts estimate could represent an additional 1.5bn bushels of soybean use”.
The extra 2.1bn gallons of annual renewable diesel capacity will come online by 2024, on Goldman estimates, will create an extra 17bn gallons in vegetable oil demand, “in all, equivalent to circa 1.47bn bushels of soybeans”.
Meeting this extra demand will require expanding US and Latin American corn and soybean plantings – implying a need for higher prices, which will get further support from the need to offset higher farmer input costs of the likes of energy.
“As a result, we believe there will be a structural repricing higher of agriculture products in coming years, with deferred forward prices for corn, and especially soybeans, needing to rally further.
“We believe this year’s reversal reflects the beginning of a multi-year structural repricing higher for crops.”
Price forecast upgrades
Goldman revised higher its forecasts for a number of ag contracts – including a hike of up to $1.30 a bushel for expectations for Chicago soybean prices, now seeing them at $11.50 a bushel on a 12-month horizon.
That is above the $10.58 ¾ a bushel at which the November 2021 contract was trading at on Friday.
For corn, upgraded price forecasts – to $4.50 a bushel on a six-month timescale, and $4.35 a bushel in 12 months’ time – were ahead of the futures curve too, with the May 2021 lot trading at $4.35 ¼ a bushel, and the December 2021 contract at $4.11 ¼ a bushel.
For cotton, which competes with corn and soybeans in sowings programmes in the likes of the US and Brazil, forecasts for New York prices were above the futures curve too, at 74 cents a pound in six months’ time, and 75 cents a pound in 12 months.
“We see cotton demand growing in 2021 as global growth rebounds,” the bank said, forecasting a world output deficit of 3m tonnes in 2021.
‘Likely be bearish’
However, for agricultural commodities as a whole, given price increases already seen this year, the bank was cautious over prospects for extra headway overall in 2021.
The bank forecast a negative 1.0% return from agriculture, excluding livestock, as measured by the GSCI index over the next 12 months, with the Bcom set to show a 0.6% decline for grains and 1.3% growth for softs.
For Chicago wheat, Goldman forecast prices at $5.85 a bushel in six months’ time, and at $5.50 a bushel on a 12-month horizon – below the $6.05 ½ a bushel being priced into the May 2021 contract, and the $6.11 a bushel at which the December 2021 lot is trading at.
“Global wheat balances are better supplied than corn, as a strong 2019-20 harvest in Russia left carry-in stocks up 30m tonnes year on year.
“Trend yields would therefore likely be bearish for prices,” Goldman said, acknowledging that its price expectations were “below market forwards”.
Downbeat on cocoa
For cocoa, the bank forecast “downside to prices in the first half of 2021”, saying that the boost to demand promised by Covid-19 vaccines would only come later next year, as travel resumes.
In fact, the global supply outlook for 2021 was “increasingly bearish, as ample rains and sunshine aid West African crop development prior to the December-March harvest”, Goldman said, forecasting prices at $2,400 per tonne on a six-month horizon and at $2,500 per tonne in 12 months.
New York’s May contract stood on Friday at $2,693 per tonne, and the December 2021 lot at $2,620 per tonne.
‘Upside risks to prices’
It also saw sugar prices “moderating” in the first half of next year, reaching an equilibrium of 13.5-14 cents a pound, weighed by the demand threat posed by the fresh wave of Covid-19 infections in Europe and the US.
However, for arabica coffee, while near-term forecasts were below the futures curve, at 122 cents a pound in three months and 120 cents a pound for six months’ time, the bank acknowledged “material upside risks” to these estimates from dryness in top producer Brazil.
“La Nina presents upside risks to prices, as drier south central Brazilian weather is causing flowers to wilt across Minas Gerais – a leading indicator for falling yields,” and potentially taking prices to 135-145 cents a pound, “above market forwards”.
