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July saw a moderate increase in grain and sugar prices across trading rooms, driven mostly by weak market fundamentals and strong energy prices. Cocoa and semi-skimmed milk powder futures, however, sustained downward adjustments between 1-30 July. Current financial instability in the US and the EuroZone might result in short-term volatility for soft commodity trading over the August/September period.

Background

A reverse to weaker market fundamentals prompted a rally in global grain prices in July as US Department of Agriculture (USDA) data showed lower than expected wheat and corn stocks. In addition, concerns about supply output alongside strong demand projections contributed towards putting upward pressure on sugar and rice futures. Conversely, robust prospects for skimmed milk powder and cocoa production dampened appetite for the short-term buying of these commodities during July.

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From the point of view of demand, there is concern in trading rooms that tighter monetary policies in emerging Asian economies might start to slow global economic growth. Data released on 1 July showed a drop of 1.1 percentage points in China’s official Purchasing Managers’ Index, a key measure of industrial activity in the country. Demand from Asian economies has proved crucial in fuelling short-term commodity trading, and industrial indexes in the region are regarded by traders as a key indicator of the performance of futures contracts. In addition, uncertainty surrounding the degree of exposure of Italian banks to Greek debt prompted on 12 July a contraction in short-term funding across stock exchanges. This was because risk aversion encouraged traders to entrench in safe havens, namely gold and US dollar treasuries, and close open positions in agricultural commodities. The effects of a potential rally of the dollar and nominal commodity prices was, however, constrained by concerns about a potential US default on 2 August. Overall, the US Dollar Index remained relatively stagnant (-1%) in July despite short-term fluctuations in relation to all other major currencies.

Wheat

CBOT front month wheat futures rose by 15% between 1-31 July, closing at US$6.7 per 60lb bushel. CBOT front month wheat futures declined by 5% between 29 June and 5 July, reversing partially the gains achieved the previous week. Futures declined by 9% in just one day (30 June). This sharp drop was down to a number of factors. A downturn in corn prices and favourable weather conditions in Europe, the US and Canada were regarded as a negative force on prices. In addition, the US Department of Agriculture’s 1 June wheat report showed a 6% rise in global stocks over the previous month. Finally, a stronger dollar environment curtailed short-term funding among international investors, adding to the existing downward pressure on commodity prices. Stronger demand for corn and a reversal to a weaker dollar, however, contributed to a rally (+15%) in nominal wheat futures between 6-13 July. Conversely, wheat front month futures declined by 4% between 13-21 July on the back of stronger market fundamentals. Russian officials suggested that the grain crop for the present season could increase to 90 million tonnes, up from the current estimate of 85 million and 61 million last year. Concerns about supply of wheat prompted traders to liquidate some open positions and take the profits generated in previous weeks. The drop in prices was, however, slowed by a weak dollar environment, which increased short-term funding availability among non-US investors. Wheat futures remained stable between 21-31 July. Price rises were slowed by a stronger dollar environment and weather forecasts projecting cooler conditions in US planting areas over the coming weeks.

Corn

CBOT front month corn futures rose by 4% between 1-31 July, closing at US$6.70 per 60lb bushel. CBOT front month corn futures declined by 3% between 29 June and 8 July, reversing the gains achieved the previous week. Futures declined by 10% in just one day (30 June). USDA’s monthly grain report on 30 June showed higher ending corn stocks than expected, causing a downturn in cash prices which had knock-on effects on the futures market. Short-term selling was further underpinned by an upgrade to output projections from the International Grains Council (IGC). The IGC raised its world corn production forecast for the 2011/2012 season to a record high 858 million tonnes, up from the 843 million projected in its May report. There was some support, however, in the form of stronger demand from China and South Korea. Corn futures rose by 7% between 8-13 July, reversing the losses sustained during the first week of the month. This rise was partially driven by lower than expected estimates on world corn ending stocks for the 2011/2012 season, which according to USDA projections will be 7% lower than in the 2010/2011 season. CBOT corn futures returned to a declining trajectory between 13-21 July, with prices dropping by 6%. This moderate decline was partially prompted by profit-taking moves among traders, who took a bearish stance. The latter were concerned about the impact that the non-extension of quantitative easing, confirmed by the Federal Reserve on 12 July, could have on short-term funding and energy prices. CBOT corn futures remained relatively stable between 21-31 July, declining by just 2% in nominal terms. Price rises were slowed by a stronger dollar environment and weather forecasts projecting cooler conditions in US planting areas over the coming weeks.

Cocoa

LIFFE front month cocoa futures declined by 6% between 1-31 July, closing at £1,852 per tonne. LIFFE front month cocoa futures declined by 3% between 1-11 July, reversing the gains of the previous week. From a supply perspective, cocoa prices were pressured down by data showing robust output in Cameroon. According to official statistics released on 10 July, Cameroon’s August-May cocoa bean exports reached 191,528 tonnes, up 21% from 158,262 tonnes a year earlier. Weak labour data in the US and a stronger sterling environment linked to the debt crisis in Italy and Greece added to the bearish mood among traders, preventing any short-term recovery in cocoa futures on the London Stock Exchange. Conversely, data released by the European Cocoa Association (ECA) showing an 8% rise in grindings and rumours of low output prospects for the coming season in Indonesia prompted a short-term rally in prices one week later, with cocoa futures rising by 5% between 11-18 July. Strong export data released by officials from Côte d’Ivoire, alongside a relatively strong sterling environment, prompted a contraction in short-buying, with cocoa front futures declining by 7% between 21-31 July. Côte d’Ivoire’s shippers and cocoa processors declared 1,177,670 tonnes of cocoa for export during the October 2010-July 2011 period, 28% up on the previous season.

Rice

CBOT front month rough rice futures rose by 15% over the 1-31 July review period to close at US$16.10 per hundredweight (CWT). Rice future prices have recovered amid concerns about lower than expected US rice production, which could be affected if the current dry weather continues in August and September. In addition, further upward pressure on prices is being driven by the relative strength of other grains, particularly wheat and corn, which compete with rice for arable land.

Semi-skimmed milk powder

Average prices for skimmed milk powder at the two GlobalDairyTrade internet July auctions were down by 15% in relation to the previous month. According to the latest available Eurostat data, semi-skimmed milk powder production in EU countries rose by 9% between January and April 2011, easing concerns as to the availability of supplies at a global level. Strong milk production prospects in Australia and New Zealand for the coming season have contributed to keeping milk prices down. New Zealand, the world’s largest dairy exporter, will increase milk production over the next two seasons as strong demand from China and oil-exporting nations buoys prices and boosts supply, according to government sources. Production may surge by 6% in the year ending 31 May 2012, the Ministry of Agriculture and Forestry said in a report released in mid-June. Output is expected to grow by a further 3% over the 2012/2013 season and 1% the following year, according to the same source.

Sugar

ICE sugar front month futures prices increased by 9% over the 1-31 July period to close at US$0.30 per pound. Sugar prices continued to be further underpinned by concerns about lower output in Brazil in the early part of the year as well as an early monsoon season that could weaken 2010/2011’s sugar output potential in India. That said, the rise in sugar prices was somewhat slowed by news from the Mexican national sugar industry chamber on 1 July suggesting that Mexico’s sugar exports to the US for the 2010/2011 season would likely be more than the forecast record 1.3 million tonnes. In addition, sugar prices were pressured upward again on 22 July, underpinned by expectations of strong demand in Asian markets. According to the International Sugar Organisation, China is expected to import three million metric tonnes of sugar next season despite soaring prices as production falls short of demand for the fourth season in a row.

Palm oil

BMD crude palm oil prices rose by 3% over the 1-31 July review period to close at US$1,064 per tonne. Overall, BMD crude palm oil prices have declined by 20% since the beginning of the year and prices may fall further as improving weather in major oilseed-growing regions may boost supply of global vegetable oils. Interestingly, prices started to recover in mid-July amid expectations of higher exports to India and China. Rumours that China might cancel price caps on edible oils further underpinned the optimistic mood among palm oil traders. China imposed price caps on cooking oil products in November 2010 as part of inflation-fighting efforts, a move that slowed down palm oil imports.

August-September 2011 outlook

Uncertainty over the viability of the second Greek rescue package might continue to have a negative effect on soft commodity futures, hampering availability for short-term trading funding. Overall, uncertainty surrounding treasuries ratings in the US and the EuroZone will act as a negative force on soft commodity trading by dampening appetite for risk, diverting speculative funds to gold and haven currencies like the Swiss franc and the Australian dollar. In addition, short-term fluctuations in the euro and US dollar might result in short-term nominal price distortions in trading rooms. Conversely, sustained economic growth in Asia and Latin America will continue to underpin strong energy prices, preventing dramatic dips in grain futures in the medium term.

From a real supply perspective, a continuation of the wet weather conditions in the south of Europe might result in a downgrade of global stock grain levels. Furthermore, the correction in milk powder prices seen in July is likely to be continued over the two next global auctions in August, unless an unexpected change in weather significantly changes current output prospects in New Zealand. In addition, favourable weather forecasts for West Africa will continue to put downward pressure on global cocoa prices in August/September. However, the mood in trading rooms suggests that the price decline, if it happens, is likely to be fairly smooth and not exceed the 10-20% mark. Finally, a significant drop in sugar and rice prices over the coming weeks remains fairly unlikely as robust demand in Asian countries is showing low sensitivity to recent cost hikes.

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