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Closing The Gap

April 2016

Agri-commodities prices continue to remain under pressure. However, the gap between global supply and demand is expected to narrow this year

While the initial part of the year has seen buoyancy within commodities at large, the agri-commodities segment continues to remain under pressure. The Bloomberg Agriculture Index, a representative index comprised of eight farm products has seen a 4% decline in the current year as on February end. While March has seen the gauge regain lost ground, as seen from the chart prices have had a fairly dismal run over the last few years with the broad trend being downwards. The index slumped to a 7 year-low recently. As highlighted in the January 2016 report Commodity Markets Outlook, World Bank, agri prices are projected to decline 1.4%, with declines in almost all main commodity groups, reflecting adequate production prospects.

Wheat Glut
Making its first global production forecast for wheat in 2016, the Food and Agriculture Organization (FAO), estimates the year’s harvest at 723 mt (million tonnes), marginally lower than the record hit in 2015. The European Commission highlighted that unsold wheat inventories within the European Union, the world’s top wheat producer, will reach an 8-year high as on end-June 2017. All of this underscores the fact that the wheat industry is seeing a glut of supply, which is expected to continue going ahead. Prices have remained largely range bound for the initial part of the year and this trend is expected to continue going ahead with a downwards bias.

Rice Price Stabilizing
In its February 2016 released report, the U.S. Department of Agriculture (USDA) expects global trade in rice to continue declining for the second consecutive year in 2016 — a reflection of reduced exports from India, Australia, Cambodia, and the U.S. Added to this are the reduced imports by Nigeria, the world’s second-largest rice import market after China. Rice imports by China have been at record high levels since 2012 and are expected to grow 4% in 2016, reflecting prices that are lower in the global market than the domestic market. Despite the current stability in the rice market, there are reasons for concern about the medium-term (mid-to-late 2016) direction of the market. The rice stocks of 5 major exporters including India, Thailand, Vietnam, Pakistan, and the U.S. continue to slide since peaking at nearly 41 mt in 2013. Of these, significant concern centers India’s deteriorating grain situation is particularly worrisome to the market.

Soybean Strengthens
USDA analysis highlights a preference amongst farmers towards corn over soybean owing to favorable input prices. It estimates, U.S. soybean plantings at 82.5 million acres, approximately 200,000 acres lower than their estimate one year ago.
While soybean and corn prices exhibit a high degree of correlation, sentiment does favor the corn industry. Prices in the exhibit reflect the outperformance of Corn prices in recent times. At around $365/bushel, corn prices continue to remain range bound given the average price of $376 / bushel since January 2015.

Pulse Spikes
The aftershocks from what has come to be referred to as the ‘Dal Shock’ within India, a result of hoarding by traders to extract high prices exacerbating fears caused by crop concerns, continue to haunt the pulses segment. Besides with the winter crop ready to harvest from April, increased availability is expected to keep prices under check.

Sugar Sweetens
February 23rd recorded intra-day raw-sugar prices surging the most in nearly 22 years after the International Sugar Organization (ISO) increased its forecast for a production deficit in the current crop year amidst increasing concerns about the impact of the El Nino weather pattern on supplies. ISO estimates world production in the 2015-16 period will trail consumption by 5.02 million metric tons (mmt) compared to a November estimate of a 3.5 mmt shortfall.

Cotton Poised to Rise
According to the International Cotton Advisory Committee (ICAC), global cotton stocks, currently at record levels, are expected to fall 8% to 20.4 mt in the 2015-16 crop year, with production declining 15% to 22.2 mt. Inventories in China, whose stocks account for more than half of the world’s total, are forecast to fall 7% to 12 mt, while stocks for the rest of the world are predicted to fall 9%. The ICAC cut price outlook to 70 cents a pound, the weakest season-average price since 2008-09. Coffee prices in the near term are poised to climb aided by what is increasingly being referred to as the strongest El Nino effect in almost two decades.

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