Grains a better bet than soft commodities – BarCap

Futures in grains, supported by tight corn supplies, are a better bet than soft commodities, of which only cocoa looks set for price rises, Barclays Capital said, in a report forecasting a "bumpy ride" for raw materials.

The outlook for commodity investors "is more challenging than it has been some time", with volatility set to prove "considerably greater" as the market factors in heightened concerns for the world economy at a time of relatively tight raw material supplies, the investment bank said.

Investors should expect "greater dynamism" in spreads between contracts for near-term delivery and further-ahead lots, and "a broader range of performance both within and between commodity sectors".

However, corn looked set to emerge as one of the best performers, backed by summer downgrades to the US crop, the world’s biggest, which "will keep the market nervous and propel prices higher".

‘Decisive effect’

"We remain bullish on [corn] prices through the second half of 2011 and into early 2012," BarCap said, while adding that "a further contraction in US supply" will be needed to return futures to their record levels near $8 a bushel reached in June.

In fact, the bank highlighted that buyers would seek to substitute corn for lower-priced wheat – supporting "modest upside" for wheat prices despite relatively abundant world supplies.

"Substitution on the demand, especially for feed use, and supply sides, in terms of acreage allocation, will mean the trajectory of corn prices will have a decisive effect on how wheat prices trade."

Soybean future also looked set to rise, presenting a "firmer price profile" in the second half of the year than the first, boosted by official downgrades to the US crop, also the world’s biggest, and purchases by China, whose imports look set to revive now crushers margins’ are positive again.

"[China’s] structural reliance on imports in light of constrained land and spiralling consumption… have made imports a necessity rather than a choice," BarCap said.

Cocoa vs coffee

The upbeat forecasts for Chicago crops contrasted with the bank’s outlook for New York-traded soft commodities, many of which face battles against looser supplies.

Cocoa, trading at $2,961 a tonne for New York’s spot September contract on Tuesday, looked to "edge up to" $3,000 a tonne by early 2012, backed by a production decline as weather in Ivory Coast and Ghana, the top producers, returns to "less than ideal" conditions, following a benign 2010-11.

"Further, while near-term supply risk from the Ivory Coast has eased, longer-term supply growth and structural issues remain a concern on ageing trees and low yields."

However, in coffee, a production surplus of 1m bags "should weigh on prices" in the fourth quarter of 2011 and in 2012.

"Production prospects in 2012-13 look favourable and are likely to pressure prices further as the market moves into a larger surplus," BarCap said.

‘Rosy production prospects’

Sugar futures, while supported for now by downgrades to Brazilian output, also look set to decline in the fourth quarter and into 2012, as supplies from India and Thailand come on line.

India, the second-ranked sugar provider, has "rosy production prospects", thanks to improved Monsoon rains and a expanded sowings encouraged by high prices.

And cotton futures will display "an increasing inability" to hold the 100 cents a pound level as the impacts of increasing world production, and growing competition from synthetic fibres, feed through.

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