Investors are "undervaluing risk" in agriculture, Rabobank
said, even as it cut hopes for near-term wheat prices, and for prices of palm
oil, which look set to continue to be depressed by buoyant production.
The bank contrasted the decline in price volatility "in
almost all agricultural market to multi-year lows" with "highly uncertain"
supply fundamentals evident in, for instance, the slump in corn and soybean stocks
following disappointing US and South American harvests last year.
"Agricultural markets appear to be undervaluing risk," Rabobank
said, noting that volatility was declining across most asset classes "amid a
surplus of liquidity emanating from central bank stimulus programmes".
'Higher geopolitical risk'
However, agricultural commodities were vulnerable to "another
volatile move in 2013" given poor growing conditions "in a number of the world's
key producing regions, and in the US ahead of [spring] planting."
Rabobank wheat price forecasts and (change on previous forecast)
Q1 2013: $8.30 a bushel, (-$0.80 a bushel)
Q2 2013: $7.95 a bushel, (+$0.20 a bushel)
Q3 2013: $7.50 a bushel, (-$0.15 a bushel)
Q4 2013: $7.25 a bushel, (+$0.25 a bushel)
Prices: quarter average, Chicago front-month contract
And, longer-term, the risks of price volatility were being
raised by an increased reliance on "less reliable" production regions.Traditional producing regions have limited ability to substantially
increase production as land resources are tapped out," the bank said.
"Production in regions such as South America and the Black
Sea region is becoming critical to help meet demand needs. However, these
regions typically have more volatilie weather, less reliable logistics and
higher geopolitical risk.
"Both short-term and long-term trends suggest markets are failing
to accurately reflect likely volatility in agri markets."
Yet the comments came as Rabobank cut expectations for palm
oil futures by up to 400 ringgit a tonne, citing improved prospects for output
from Indonesia and Malaysia, the top two producers, for which the harvest
estimate was raised by 1m tonnes to 47.5m tonnes.
"We expect this high output will continue to cause prices to
trade rangebound in the first quarter of 2013, as we see little additional
demand coming online to compensate for the higher production," the bank said in
a monthly briefing.
The bank also reduced its forecast for Chicago wheat in the
near term – by up to $0.80 a bushel - if still keeping its expectations above
those that futures are pricing in.
However, it raised its estimate for wheat futures heading
towards the end of the year, citing reduced prospects for some 2013 crops, with
the estimate for the US harvest cut by 176m bushels to 2.18m bushels following
drought setbacks to the early growing season.
Rabobank palm oil price forecasts and (change on previous forecast)
Q1 2013: 2,400 ringgit a tonne, (-400 ringgit a tonne)
Q1 2013: 2,700 ringgit a tonne, (-300 ringgit a tonne)
Q1 2013: 2,600 ringgit a tonne, (-200 ringgit a tonne)
Q1 2013: 2,500 ringgit a tonne, (-200 ringgit a tonne)
Prices: quarter average, Kuala Lumpur front-month contract
"Expected abandonment for 2013-14 is increased from 12.8% to
15.0%, as ongoing rainfall deficits in hard red winter wheat regions, combined
with the worst pre-winter conditions on record, are likely to limit emergence in
the spring," the report said.The estimate for Russia's harvest was cut by 2m tonnes to
51.2m tonnes "as the winter period has failed to see improvements to lingering
drought conditions from 2012-13.
"While large year-on-year production increases in 2013-14
are not in jeopardy at this point, we note that severe drought conditions remain
a significant downside risk to 2013-14 production."
Rabobank also became the latest in a series of forecasters,
including the likes of Macquarie, to sound a, relatively, bullish note on
cotton prices, raising its estimate for values at the close of the year by 5
cents to 85 cents a pound.
While short-term values are likely to be depressed by the release
of supplies from some of China's huge inventories, prices will rise late in the
year "as a reduction in exportable supply impacts the market".
"Dry conditions continue to hamper global cotton," the bank
said, flagging the impact of a heatwave on non-irrigated Australian crops, and
dryness in Brazil and India too.
"We forecast a 9% year-on-year reduction in the Indian crop
in 2012-13, and may have to adjust our output expectations further if arrivals
continue to lag.
"The price impact of changes to Australian, Brazilian and Indian
crop estimates are significant given they represent the second, third and