Rabobank Outlook2012

Outlook 2012—Down, But Not Out

Agri Commodity Markets Research

Rabobank International

Agri Commodities Market Research

Food & Agribusiness Research and Advisory

[email protected]

Authors:

Luke [email protected]

Keith [email protected]

Erin [email protected]

Nick [email protected]

Outlook 2012—Down, But Not Out

Agri Commodity Markets Research

Disclaimer: This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading asRabobank International (“RI”). The information and opinions contained in this document have been compiled or arrived at from sourcesbelieved to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by RI or any of itsaffiliates to enter into a transaction, nor is it professional advice. This information is general in nature only and does not take into account an individual’s personal circumstances. All opinions expressed in this document are subject to change without notice. Neither RI, nor otherlegal entities in the group to which it belongs, accept any liability whatsoever for any loss howsoever arising from any use of this documentor its contents or otherwise arising in connection therewith. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. All copyrights, including those within the meaning of the DutchCopyright Act, are reserved. Dutch law shall apply. By accepting this document you agree to be bound by the foregoing restrictions. © Rabobank International Utrecht Branch, Croeselaan 18, 3521 CB, Utrecht, the Netherlands +31 30 216 0000

Contents | i

ContentsPage

Section 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

A review of our forecasts for 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Section 2

Key themes for agri markets in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Economic slowdown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Biggest losers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

US and EU to stumble along . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Emerging markets to drive demand growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Doomsday outcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Economic outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Speculators and the US dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Correlation spike . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Speculators abandon ags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Winners and losers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Policy risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Fuelling policy speculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

The re-emergence of protectionism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Grains and oilseeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Chinese import policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

West Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Capacity constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Supply squeeze . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Increased yield volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Higher price floors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Section 3

Agri Commodity Outlooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Base case: Stumbling along . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

High case: Recovery stronger and faster than expected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Low case: From bad to worse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Wheat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Corn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Soybeans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Palm Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Sugar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Coffee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Cocoa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Cotton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Livestock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Live cattle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Lean hogs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Section 1 Introduction | 1

Rabobank sees agri commodity prices down,but not out, in 2012. Improved fundamentalbalances and uncertain economic conditionsare expected to keep prices below the 2011highs. However, risks to our price forecasts are skewed upwards as reliance uponnontraditional producers pose an increasingthreat, and inventories remain near historical lows.

We believe the long-term bull run in agricommodities remains, but expect pricesacross the complex to ease from their recordhighs, continuing their downward trajectoryin place since mid-2011. Absent further macrodeterioration, prices are unlikely to plunge to

the levels seen in 2008/09. Elevated pricelevels must persist in order to encouragefarmers to continue expanding production to keep pace with demand growth andallowing global inventories to rebuild.

Agri commodity demand should remainrobust in 2012 as consumptive growth inemerging-market economies continues todrive the agri complex. Our analysis suggeststhat supply side risks, from both weather and politics, have increased again for 2012 and there remains considerable risk of aninflection in both price and volatility levelsamid adverse production conditions acrossthe agri complex.

1 Introduction

Figure 1.1: Rabobank’s 2012 agri commodity price forecasts

Q1’11 Q2’11 Q3’11 Q4’11f Spot* Q1’12f Q2’12f Q3’12f Q4’12f

Wheat (CBOT) USc/bu 788 748 688 610 579 595 630 615 595

Wheat (Matif) EUR/tonne 253 234 199 170 179 162 175 172 166

Corn USc/bu 674 732 696 620 585 610 645 630 610

Soybeans USc/bu 1,381 1,363 1,358 1,165 1,122 1,178 1,226 1,260 1,251

Soy oil USc/lb 57.0 57.3 55.8 49.4 49.3 48.7 50.2 49.1 47.5

Soymeal USD/ton 260 240 230 300 282 310 290 330 335

Palm oil MYR/tonne 3,681 3,365 3,100 3,000 3,171 2,800 2,900 3,000 3,100

Sugar USc/lb 30.6 24.4 28.7 24.5 23.1 23.5 23.0 22.0 22.0

Coffee USc/lb 258 271 257 230 232 220 200 180 170

Cocoa USD/tonne 3,322 3,042 2,969 2,400 2,246 2,350 2,450 2,350 2,300

Cotton USc/lb 182 168 108 95 91 85 85 80 80

Source: Rabobank, Bloomberg, 2011

2 | Rabobank Outlook 2012—Down, But Not Out

Rabobank’s 12-month outlook for prices from current levels

SOYMEALSoymeal prices are likely to rebound in 2012 afterunderperformance relative to soy oil and soybeans in 2011.

SOYBEANSSoybean prices are likely to be lower YOY in 2012, but remain historically elevated, rationing demand, as global production declines.

LIVE CATTLEUS live cattle prices are expected to fall in Q1 2012 from theirNovember 2011 highs as a record number of cattle on feed outstripsdemand in the near term.

CORNAlthough lower than 2011 averages, we expect corn prices to rallyfrom current spot prices into Q2 2012 before easing in Q4 2012 onrecord production.

COCOAAbundant supply of cocoa beans and better expectations for the2011/12 crop are expected to lead prices lower in 2012.

SOY OILThe demand profile for soy oil is relatively recession-resistant, which will likely see prices remain elevated in order to slow demand growth.

WHEATNeutral price direction is expected over the next 12 months as thesecond largest world wheat crop on record softens the fundamentaloutlook, but coarse grains provide support.

PALM OILDespite our forecast for record large palm oil production in 2012, weexpect the low stock levels of total vegetable oils to limit palm oil’sprice downside.

LEAN HOGSMomentum in the US lean hog market is expected to wane in 2012as producers increase farrowing to meet demand and Chineseimport growth slows.

SUGARWe forecast lower international sugar prices in 2012 as the marketshifts into a surplus for the first time in three seasons.

COTTON We expect the global cotton industry to be under pressure andprices to fall due to the largest global cotton crop on record.

COFFEEPrices are forecast to fall in 2012 due to the large harvests expectedin Brazil and Vietnam, but diminished stocks will keep risks high.

We see lower average prices for all agricommodities covered in our 2012 forecast.However, we see upside, from depressed spotprices, for corn, wheat, soybeans, sugar andcocoa as fundamentals reassert themselvesand market participants continue to come togrips with the European debt crisis. We seedownside to cotton and palm oil prices in theshort term. In the livestock sector we expecthigher live cattle prices and slightly lower leanhogs prices in 2012.

Our outlook is centred on four key themes for the agri commodity markets in 2012which we expect to determine commodityprices. Aside from the inherent weatheruncertainties in agriculture, we identify these variables as critical for the agri complexover the next 12 months.

1. Economic slowdown

2. Speculators and the US dollar

3. Policy risks

4. Capacity constraints

Given the heightened uncertainty in themacro environment, we have decided toframe our price and fundamental forecasts in base, low and high-case scenarios to give guidance over the level of confidencearound our economic forecasts and macrolevel assumptions.

Section 1 Introduction | 3

A quick look in the rear-view mirror: A review of our forecasts for 2011

One of the most common questions we get when talking to clients is “how accurate were your forecasts last year?” This is avery valid question, so before we launch into our 2012 agri markets outlook, we would like to share a quick self-evaluationof our performance in 2011—the good, the bad and the ugly.

Our 2011 agri markets outlook report, Agri Bull Market Clouded by Macro Uncertainty, released in December 2010,highlighted seven key themes for the year ahead.

1. Tightening inventory levels2. Supply limitations 3. Demand growth from emerging markets4. China commodity short 5. Heightened political risk amid tightening food supplies 6. Fundamentals only part of the story 7. Sustained heightened volatility

These were the issues we saw as the most important variables likely to influence agri commodity markets in 2011, inaddition to constant supply and demand drivers, such as weather vagaries. Overall, these issues all showed varying degreesof relevance in 2011, and many of them will remain relevant in 2012, assuming the absence of major weather events.

As last year’s title suggested, from a fundamental viewpoint we held a bullish outlook for the agri complex; our priceforecasts showed an expectation of higher prices for all but one market in 2011. Our top picks for 2011 were corn, soybeansand coffee, and as it turned out, two out of three ranked at the top of the list in terms of year-on-year price increases, withcoffee the top performer, followed by cotton and corn (see Figure 1.2). Our price forecasts for most commodities weregenerally accurate in terms of direction, with only cocoa moving against our forecast due to the outlier event of theelection crisis in Ivory Coast, which we did highlight as a risk, and which created an unexpected rally for prices. Interestingly,as the situation has normalised and supply chains have restocked, prices have tracked in line with our forecast curve, albeitat an elevated level (see Figure 1.3).

The other major event of 2011 was the hottest July the US Midwest has seen in over 50 years, which reshaped the supplyside of the balance sheet for the grains complex. This extreme weather event resulted in both a production forecast downgrade of over 10% and significantly higher prices. Since April, our price forecasts have reflected a much tighterbalance sheet and have quite accurately indicated Q2 as a turning point with quarter-on-quarter declines forecast for Q3and Q4 (see Figure 1.4).

Figure 1.2: Rabobank 2011 forecasts (December 2010) vs. actual, 2011

Rabobank 2011 f orecasts (December 2010) Actual

Q1’11 Q2’11 Q3’11 Q4’11 Q1’11 Q2’11 Q3’11 Q4’11

Wheat USc/bu 700 680 675 675 788 748 688 610

Corn USc/bu 600 580 550 540 674 732 696 620

Soybeans USc/bu 1,300 1,275 1,200 1,185 1,381 1,363 1,358 1,165

Soy oil USc/lb 53 54 52 52 57 57 56 49

Soymeal USD/ton 355 350 345 340 367 354 353 300

Palm oil MYR/tonne 3,650 3,200 2,900 2,750 3,681 3,365 3,100 3,000

Sugar USc/lb 28 26 24 22 31 24 29 25

Coffee USc/lb 195 195 190 185 258 271 257 230

Cocoa USD/tonne 2,550 2,450 2,350 2,300 3,322 3,042 2,969 2,400

Cotton USc/lb 135 115 90 85 182 168 108 95



Our most accurate price forecasts across the year were for oilseeds (soybeans, soymeal, soy oil and palm oil) and wheat,where negative supply-side issues were less of a factor (see Figure 1.5). Our least accurate forecasts were two of the ‘COs’,cotton and coffee, where despite the direction of the forecast being correct, the magnitude of the price increases was wellabove our expectations.

Our commodity price forecasts are provided as a guide to demonstrate our expectations for price direction throughout the year—regularly updated in our Agri Commodity Markets Research Monthly reports. In view of the level of volatility in the macroeconomy and the general uncertainty in 2011, our forecasts from a year ago have turned out to be reasonablyaccurate. Our bias for higher prices in the complex proved correct and our top picks—corn, soybeans and coffee—performed better than expected. The seven key themes we identified all played a role in price movements during 2011,most notably supply limitations and heightened political risk due to their impact on corn and cocoa prices. As these risksintensified in Q1 2011, our price forecasts were more accurately revised higher while maintaining a downward bias towardsthe end of 2011. Although our forecasts for 2H 2011 appeared bearish against market estimates and the futures forwardcurve, our expectations for more balanced fundamentals and an easing in prices have largely played out, and we expectthis to continue into 2012.

Figure 1.3: ICE NY Cocoa; Rabobank forecast vs. actual prices, 2010-11


USD

/to

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Actual Dec 2010 forecast

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2,400

2,600

2,800

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3,200

3,400

Q4'11Q3'11Q2'11Q1'11Q4'10Q3'10Q2'10Q1'10

Figure 1.4: CBOT Corn; Rabobank forecast vs. actual prices, 2010-11

Source: Rabobank, Bloomberg, 2011 U

Sc/b

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Actual Dec 2010 forecast Apr 2011 forecast

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Q4’11Q3’11Q2’11Q1’11Q4’10Q3’10Q2’10Q1’10

Figure 1.5: Rabobank quarterly average price forecasts vs. actual price moves in 2011


per

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Section 2 Key themes for agri markets in 2012 | 5

Economic slowdownSlowing global economic growth in 2012 will only have a modest impact on agricommodity prices as resilient emerging-market demand offsets anaemic growthexpectations in the developed world. We expect commodities that have a largespeculator long position and those with a high correlation to global growth, including livestock and cotton, to be the most vulnerable to slowing global growth.Commodities with a stable demand base and supportive fundamentals, such as cornand coffee, are expected to be the leastexposed to a contraction in economic growth.

Rabobank sees continued macro uncertaintywith stagnant growth prospects in the EU and the US, and resilient but weakerexpansion in the emerging-marketeconomies in 2012 (see Figure 2.1). We viewthe prospect of a return to recession as aconsiderable risk for both the US and the EU,but we expect any contraction to be shallow.As industry and governments are aware ofthe recession risk and are positioneddefensively, we expect a downturn to besmall. Our emerging-market growth forecastprojects a level of growth similar to what wasseen in the first half of the decade, and whilethe emerging markets are not likely to be able to decouple from the developed world, wesee domestic consumption prospects andproactive governments as reasons theseeconomies will avoid being dragged into arecession by the developed world economies.

Biggest losersWe anticipate an increased supply of manyagri commodities to result in lower prices in2012, but we do not expect a price collapsedue to supportive demand and only a modestbuild-up of inventories. However, as supply isforecast to be historically tight for many agricommodities, we anticipate supply-sideconcerns to remain a major supportive factorfor most markets, especially coffee and corn.On the demand side of the ledger, we expectlower international prices to encourage buyingand stock-building. In our view, demand loss inthe developed world will be inconsequentialeven with an economic downturn, as lowerprices encourage commercial buying. Demand growth in emerging markets isexpected to remain robust and a driver of prices in the agri complex.

We see the cotton and livestock markets as most vulnerable to economic contractionand stagnant growth. Total meat and fishconsumption in the US peaked in 2004 andhas been declining ever since due to altereddiets and reduced incomes. This trend is beingcountered by increased meat and fishconsumption in emerging markets, which ismore than enough to offset the reduction inUS consumption. In our view, the highervalued livestock markets will be exposed todemand loss if there are further reductions tohousehold incomes in the US. The high shareof speculators in the livestock futures markets is also viewed as a threat since a risk-off sell-off could pressure the markets. The speculatornet long in the US livestock markets of

2 Key themes for agri markets in 2012

15 November represented 22% of total openinterest, up from 9% in early June, and upfrom the 2011 average of 18%. Given thefundamentals, there is a compelling reasonfor livestock values to be elevated currently,but we see the market as particularlyvulnerable to macro risks. Since cotton is aconsumer product, the cotton market is alsohighly susceptible to recession, and given theforecast fundamentals in the new season, wesee heightened downside risk. Cotton priceson the NY market have fallen during the lastseven US recessions going back to 1970 (see Figure 2.2). Cotton prices are forecastlower in 2012 due to better supply andlacklustre demand, but weakening economiescould extenuate the downside correction.

Differing underlying fundamentals as well as diverse income elasticities of demand will result in varied price reactions amongcommodities during recessionary events. Weexpect the main economies of the world toremain out of recession in 2012, but as risks ofa double-dip recession in both the US and theEU are high, we have reviewed the potentialresponse in the agri complex. In general,recessions do not impact agri commoditiesuniformly. In fact, supply dynamics are muchmore important for price movements, andthis is expected to be the case in the event ofa recession in 2012. Recessions have littleeffect on the demand side in the developedworld and economic contractions do notgenerally impact supply, which is much moredependent on long-term prices and weather.The downside risk for commodities is muchlarger if a sizeable slowdown in emergingmarkets occurs, as this is the source for muchof the expected expansion in consumption.

US and EU to stumble alongRabobank’s macro economists are forecastingeconomic growth in the US to be slightlylower in 2012 as political deadlock andwaning consumer confidence result ineconomic stagnation. Gross domestic product(GDP) in the US is forecast to grow at 1.5% in2012, down from 1.7% in 2011 and downfrom 3.0% in 2010. In the EU the outlook isbleaker; we expect debt concerns and stallingmember economies to bring about only slimpositive growth. EU GDP is expected to slowto 0.4% in 2012 from the 1.6% expected in2011 and the 1.8% expected in 2010. Ourmodest growth forecast assumes the EU willhave found a lasting resolution to the debtcrisis. Elevated risks remain skewed to thedownside for both regions as unemploymentremains high, market sentiment is weak andsocial unrest is rising.

We forecast limited demand loss for agricommodities in both the EU and the US even in the face of a double-dip recession.Although real incomes are declining in the US and unemployment is high in bothregions, food remains a small part ofdiscretionary incomes and the consumptionof most agri commodities is anticipated to be stable. High-value products such aslivestock or consumer-oriented cotton are the most exposed to economic risk and could be threatened depending on the scale of a downturn.

Emerging markets to drive demandgrowthRabobank anticipates emerging-marketgrowth to ease in 2012 but demand growth in agri commodities to remain strong. Weforesee economic growth rates in the


Source: IMF, Rabobank, 2011

Figure 2.1: Rabobank GDP quarterly growth estimates and forecasts, Q1 2000-Q3 2012

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Euro area China Brazil

12Q

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310

Q1

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309

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08Q

308

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307

Q1

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305

Q1

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304

Q1

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303

Q1

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302

Q1

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301

Q1

00Q

300

Q1

Source: Bloomberg, Rabobank, NBER, 2011

Figure 2.2: Performance of the S&P GSCI Agriculture Index over the past seven US recessions, Dec 1969-2009

S&P GSCI Agriculture Index Recession

0

100

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emerging markets to hover near the bottomof levels seen just before the financial crisis of 2008/09, with emerging-market growthforecast at 6.5% for 2012, down modestlyfrom 6.9% in 2011 and 7.8% in 2010, butmodestly higher compared with the 2000-2005 average of 6.0%. In our view, theemerging-market economies will not be able to decouple from a slowdown in thedeveloped world, but increasing domesticdemand will play a larger role in growth andwill be supportive for the agri complex. ForBrazil, we expect GDP growth in 2012 of 3.6%,flat from 3.6% in 2011, and we continue to see global demand for agri commodities as a driving force in the Brazilian economy. The changing diets and increasing urbanpopulation in the emerging markets are expected to remain the drivers for the agricomplex. Demand for oilseeds in emergingmarkets has grown 110% since 1999 while inthe developed world the increase has been12% (see Figure 2.3). Increasing consumptionof agri commodities in emerging markets hasplayed a major role in tightening balancesheets despite large global harvests in thepast two seasons, and we expect this trend to continue in 2012.

A slowdown in the key Chinese economy in2012 is not expected to impact the growth in agri commodity demand as inventories are low for many commodities, inflation is elevated and the government has themeans and will to secure supplies on theinternational market to temper and evencontrol domestic food prices (see Figure 2.4).Food costs represent a higher share ofhousehold income in China relative to the US or the EU. This is an opportunity since thepotential to increase agri commodity demand

is significant as household incomes increaseand demand changes from staple grains tomore protein from meat. The higher share of income devoted to food in China is also athreat as higher prices can result in significantdemand destruction. The ongoingdemographic and agricultural conversionfrom a rural population and fragmentedproduction to an urban population andintensive food production will continue in2012. Domestic inflation of food prices isforecast to ease in 2012 as international agricommodity prices fall. This is likely to supportfurther increases in demand in China. In ourview, elevated agri commodity prices resultedin Chinese government destocking in 2011.The need to restock inventories will be asupportive impact for prices and is expectedto occur despite the modest forecastdownturn in economic growth.

Doomsday outcomeRabobank views the likelihood of a recessionor major contraction of the Chinese economyin 2012 as very slim. However, a contractionwould have major consequences for both theglobal economy and the agri commoditycomplex. Given the Chinese government’sreadiness to spend vast reserves to support the economy and to acquire agricommodities to alleviate high domestic pricesand avert social unrest, we would expect the agri complex to remain supported even in the case of slower-than-anticipatedeconomic growth. A hard landing for Chinawould have profound negative impacts onthe agri complex, but any contraction eventwould likely only have short-term impacts on the market.

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Economic outlookRecession or slowing economic growth willbe a threat to the agri commodity markets in2012, but in our view the expected resilientdemand growth from many agri commoditymarkets in emerging economies will helpmitigate the impacts from any economicdownturns. We anticipate lower-than-averagestock levels of many agri commodities tosupport prices; while harvests are expected to be large, encouraged by the high prices,the supply response is still catching up todemand. In our view, a recession, if it doesoccur, would be expected to be shallow and not to impact agri commodity demand.However, cotton is viewed as moresusceptible to a downturn, and livestockconsumption can also be impacted byrecession, but we see emerging-marketdemand expansion as more than sufficient to make up for demand losses in thedeveloped world. We anticipate lower pricesin 2012 as a function of better supply; this will support demand despite the heightenedglobal macro uncertainty.



Speculators and the US dollarWeak fundamentals for the US dollar shouldproduce a period of further devaluationversus most other currencies throughout2012, providing upside support for most agri markets. But as we have seen in 2011,fundamentals do not always matter.Rabobank’s base-case macro and foreignexchange forecasts suggest that a weaker US dollar environment will reappear again in 2012. While global financial market andmacroeconomic uncertainty remain asignificant risk to our forecasts, particularly if the trend of widespread risk aversioncontinues from 2011 into 2012, a generallyweaker US dollar should be a supportivefactor for the agri complex in the year ahead.

Unsurprisingly, we do not expect theweakness of the US dollar to be uniform in magnitude or even direction, with thepotential for short-term upside against the euro afflicted by political paralysis anddisunity in the member bloc. However, againstother currencies we see further downside forthe US dollar from current levels, improvingboth the purchasing power of emerging-market importers and the competitiveness of US agricultural exporters against many of their key competitors (see Figure 2.5). Wewould expect most prices within the agricomplex to appreciate in a weaker US dollarenvironment. We highlight corn, wheat,soybeans and lean hogs as the biggestwinners in the complex as the US exportmarket improves on a weaker dollar.

Once the dust settles on the EU debt crisis, we expect focus to return to weakerfundamentals for the US dollar, with downside

likely against most other commodities in2012. Loose monetary policy conditions in the US following two rounds of quantitativeeasing in 2008 and 2010, ongoing record low interest rates, high unemployment andanaemic growth expectations for the USeconomy are expected to see most othercurrencies outperform the US dollar over the next 12 months. However, we do expect to see some recovery of the US dollar againstmajor commodity currencies in 2012, whichwe believe are overvalued.

These weaker fundamentals for the US dollarlook set to reassert themselves in 2012, andwhile the US Federal Open Market Committee(FOMC) has not indicated they will implementanother round of quantitative easing stimulus(QE3) at this stage; they have not ruled it out either, and we expect this to remain inplay throughout 2012. Even without QE3, US Federal Reserve policy measures look set to remain loose, with US Federal ReserveChairman Bernanke explicitly stating that the federal funds rate was set to remain at an “exceptionally low level at least throughmid-2013”, given conditional economicconditions. Our forecasts do not see a case for strong enough growth in 2012 to moveFOMC policy from current levels. A risk to this view is the possibility that the EuropeanCentral Bank could become the lender of last resort which would have a longer termdrag on the euro, balancing the poor USdollar fundamentals.

Recovery from the current challenges appearslikely to be protracted and hence we seeloose monetary policy and a weak US dollaras capable of buttressing the US economy.

Figure 2.5: Rabobank FX forecasts, 2012

Q1’12 Q2’12 Q3’12 Q4’12

EUR/USD 1.33 1.39 1.45 1.48

USD/JPY 78.00 79.00 82.00 83.00

GBP/USD 1.56 1.62 1.69 1.74

USD/CHF 0.93 0.90 0.90 0.91

AUD/USD 1.00 0.98 0.97 0.95

NZD/USD 0.76 0.75 0.74 0.73

USD/CAD 1.00 0.99 0.98 0.98

Source: Rabobank, 2011


‘Flight to safety’ has become a common catch cry in 2011 and, given the ongoingmacroeconomic uncertainty, risk aversionmay well continue to be a key theme in 2012.This macro uncertainty—primarily the resultof the EU debt crisis, but also influenced bybipartisan politics in the US and mountingworries of a Chinese economic slowdown—has created a risk-on/risk-off tradingenvironment in all markets over the past 12 months. Risk-off has meant a withdrawal of funds from emerging market assets andcurrencies, as they are perceived to be higherin risk than the US dollar, despite growthprospects in these markets remaining muchstronger than in most developed economies.For agricultural prices, this has compoundedprice volatility as speculators have not onlyshifted into and out of the underlying agrimarkets, but also between the commoditycurrencies and the US dollar (see Figure 2.6).Looking ahead to 2012, the challengebecomes one of macro uncertainty andwhether we continue to see periods ofextreme risk aversion continuing in 2012.

Correlation spikeThe extreme macro uncertainty has resultedin all asset classes becoming even moreintertwined over the past 12 months. Broaderthemes such as liquidity, political risk, financialstability, austerity measures and social unresthave all resulted in agri markets, currencies,equities and other asset classes becominghighly correlated for most of 2H 2011. Recentdevelopments have escalated fears ofcontagion. Globally, there are considerableconcerns as to whether individual commodityor asset class fundamentals have becomemostly irrelevant as focus has shifted from riskappetite to risk aversion. In September 2011,we saw the correlations between the agri

complex and key macro indicators jumpingsharply to reflect the focus of the EU debtcrisis (see Figure 2.7). As this continues to play out, we expect uncertainty to remainelevated, resulting in a continuation of highcorrelation between most asset classescontinuing into 1H 2012.

Speculators abandon agsSpeculative money flows will largely bedetermined by the macro environment in2012, with a clear resolution in the euro areaneeded to restore confidence levels amongstinvestors. Over the past 12 months, we haveseen diverging dynamics: the first half of theyear saw surging agri markets attractingadditional investor inflows as an inflationaryhedge amid rising world food prices, while aflight to safety resulted in significant netoutflows of investor capital from agri marketsin the second half of the year. Looking ahead,a sudden and complete return of investormoney into the agri complex appearsdiminished as the macro uncertainty is likelyto remain for some time to come. We alsoexpect there will be less of a constructivefundamental story in agri markets in 2012 asfundamentals appear more in balance than inrecent seasons.

Winners and losersBased on Rabobank’s forecast of a weaker USdollar against most developed and emerging-market currencies over the next 12 months,commodities produced and exported fromthe US are the most likely to benefit. Furtherdevaluation of the US dollar in 2012 will addsupport to what we expect to be resilientemerging-market demand for agriculturalcommodities (see Figure 2.8). Recent yearshave seen considerable decoupling ofemerging-market currencies from the US

Figure 2.7: Correlation between the agri complex and key macro indicators, Jan 2007-Sep 2011


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dollar, which enables additional purchasingpower in a weaker US dollar environment. In the instance of China, one of the keydestinations for US agricultural exports, looserregulatory control has seen the Chineserenminbi gain 7%-8% versus the US dollarsince mid-2010 and over 23% since 2005. Weare forecasting a near-record 4 million tonnesof corn to be exported to China in the2011/12 season and, given domestic supplyconcerns and inflationary pressure fromhistorically high grain prices, a weaker USdollar versus the renminbi may encouragefurther imports to help meet burgeoningdomestic demand. Similarly, we also seeadditional demand support from a weaker US dollar for soybeans, pork and beef.

A weaker US dollar can also alter trade flowsby providing improved competitiveness forUS agricultural exports on the world market.Commodities we see as most likely to benefitfrom this are the key US grains and oilseedssuch as corn, soybeans and, to a lesser degree,wheat. US beef and pork exports will alsolikely benefit from a devaluation of the USdollar, although market access tends to be amore potent determining factor for thesemarkets. While the US dollar is forecast toweaken against most currencies, we areforecasting it to strengthen against theAustralian and New Zealand dollars and tohold fairly stable relative to the Canadiandollar. Although these commodity currenciesare generally defined by their economies’reliance on metal and energy exports,agricultural exports from these countries cancompete with US exports for global marketshare. For example, wheat exports fromAustralia will likely benefit from a weakeningAustralian dollar relative to the US dollar.

Figure 2.8: USD index and S&P GSCI Agriculture Index, 1993-2011


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Policy risksGlobal agricultural markets are beingincreasingly politicised, impacting globalagricultural trade, contributing to heightenedsupply uncertainty and lifting price volatility.Geopolitical factors, such as the 2010/11 Black Sea region grain export bans, and areturn of civil war to the Ivory Coast, hadsignificant impacts on agricultural markets (see Figure 2.9). We believe that 2012 will once again see political intervention as animportant determiner of winners and losers in the agri complex.

It is important to note the difference betweenthe ongoing political battles in the arena ofgeneral fiscal policy and political changesdirectly applicable to the agri complex. Our particular focus is on the potential for protectionist responses to exaggeratesupply shocks.

Protectionist responses to weather anomalies,which are likely to increase as the threat ofclimate change looms larger, are on the rise.Market sensitivity to rising food inflation inthe developing world is increasing. Upcomingpresidential elections in the US pose a risk to renewable fuel subsidies. Perhaps mostimportant of all, the over-indebted developed

world will see pressure to cut subsidies tofarmers who are operating in an environmentof near-record agri market prices. With this in mind, forecasting the political risks to theworld’s food basket, and the prices at which it is available, will become a more complextask in 2012.

We see corn and cocoa as especiallyvulnerable to political risks in 2012, althoughfundamentals are improving for both asproducers responded to higher prices byincreasing production in 2011. The riskspectrum for the agri complex is skewedfurther upward in 2012 as political risks poselarger threats to global trade balances.

Fuelling policy speculation The 2012 US Presidential Elections representthe largest potential stumbling point for USagricultural support mechanisms in severalyears. Despite market rhetoric, the US has thefourth-lowest producer support estimate as a percentage of GDP in the OECD, indicatingcomparatively low net transfers to the agricomplex. However, as rounds of budgetarynegotiations should bring about substantialreductions in US agricultural subsidies from2012 onwards, support is likely to decreaseeven further.


Figure 2.9: Policy risk hotspots in 2012


Ethanol policy review

Export tariffs and industrial action

Civil wars and cocoa-OPEC

Black Searegion export bans

Chinese strategic reserves and self-sufficiency

Sugar export quotas to support domestic prices

The biggest unknown, and a potential risk for prices for the agri complex in 2012, is the US corn ethanol/biodiesel policy. Ethanoldemand for corn, which in 2010/11 eclipseddomestic feed consumption for the first time,is currently supported through three majormechanisms:

• Tax credit for blending ethanol withgasoline, known as the blender’s credit is,currently USD 0.45/gallon. This is expectedto expire at the end of 2011.

• The expanded Renewable Fuels Standard(RFS2) mandates levels of renewable fuelblending, but caps the level of corn starchethanol. Production above this level doesnot contribute towards the total mandate.For 2012, the mandate is 15.2 billiongallons, of which no more than 13.2 billiongallons, approximately equivalent to 4.9 billion bushels of corn, can come fromcorn starch ethanol.

• A USD 0.54/gallon import tariff to supportthe domestic industry. As imports are notcurrently economical, we do not considerthe import tariff a crucial piece of theethanol puzzle in the current environment.This is expected to expire at the end of 2011.

The current environment sees an increasedrisk of a political turnaround, and subsequentrepeal, of supportive policies in the UScompared to recent years. However, therehave been remarkably few cases of federallaws being repealed in US history and thisgives us little reason to expect that the RFS2mandate will be wound back, reformed orrepealed in 2012, as congressional vestedinterests are likely to prove more powerfulthan the anti-deficit lobby.

Because the blender’s credit is unlikely to be extended and the RFS2 is unlikely to berepealed, we believe that policy risks onlypose marginal risk to corn ethanol productionin 2012, with spot- and implied future marginanalysis showing that distilling and blendingethanol in the US is currently a profitableendeavour (see Figure 2.10). This runs againstcommon perception, which still suggests thatethanol blending would suffer immenselywithout the blender’s credit. This being said,there remains announcement risk, whichcould drive down ethanol production andprices in the short term as the agri complexadjusts to a changed operating environment.

Global oil policy has a strong impact on theagri commodities complex, both throughdemand, as it affects global economic growth,and more directly through driving half of theethanol profitability equation. Followingstimulus programmes introduced by SaudiArabia during the Arab spring of 2011, it islikely that OPEC will calibrate productionthrough the 2012 calendar year to maintainprices of USD 100/barrel or higher to try tomaintain a moderate fiscal surplus in thecoming years. All else remaining equal, atthese levels, we would need to see corn pricesat USD 6.80/bushel before US ethanoldistillery profits turn negative on a spot basisand capacity is taken off-line.

The re-emergence of protectionismThe increasing reliance on nontraditionalexporters to meet the world’s agriculturaldemand leaves a number of markets in theagri commodity complex more vulnerable to supply-side shocks through policyintervention. Compounding this price risk isthe fact that we continue to see historicallylow inventory levels for a number of


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Figure 2.10: US ethanol profitability estimates, Jan 2008-Jan 2012f

Source: Rabobank, Bloomberg, 2011Note: Blender spread is the price of RBOB Gasoline-Denatured Ethanol, which approximates

the blending operating profit of US oil refineries. Producer margin is the estimate of the profitability.

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commodities, with protectionist policydecisions more easily resulting in tradedeficits or supply shortages. Supply also tends to be less reliable in thesenontraditional export countries due toweather vulnerabilities, logistical constraintsand a lower degree of social stability, allfactors which lend themselves to a greatertendency towards political intervention.Unsurprisingly, this results in markets havingto factor in risk premiums to account for theuncertainty for both producers andconsumers, thereby heightening near-term volatility.

We see grains, oilseeds and cocoa as thecommodities in the agri complex most at riskin 2012. Our custom assessment of trade-weighted geopolitical risks for sections of the agri complex highlights the increasingpolitical risk inherent to the corn andsoybeans markets as marginal productionshifts from the developed to the developingworld (see Figure 2.11). We have generally seenimproving risk profiles for soft commoditiesthough they have higher absolute levels,despite being exacerbated by higherexportable quantities which skews our metrichigher. Low stocks-to-use ratios across theagri complex would further aggravate theprice effects of any changes in the politicalsituation in the agri complex, such as:

• The potential for grain export bans or theresumption of prohibitive export tariffs in the Black Sea region is compounded by the likelihood the policies of theconstituent countries would move in parallel.

• With large shares of global grain andoilseed supply flowing from Brazil and Argentina, there is a possibility that a particularly damaging La Niña couldencourage these governments to enactpolicies to support domestic stocks andusage. Trucking industrial action inArgentina in October 2011 highlightedthis susceptibility. Prohibitive export tariffson soybeans in Argentina continue tocreate tension between the governmentand farmers.

• West Africa remains politically volatile andwe see further protectionist steps beingtaken in 2012 as Ivory Coast considersestablishing a single-buyer policy.Production concentration in this regionheightens this risk.

• Changes in Chinese engagement in theimport market are likely to be supportiveof prices, as domestic food-price stability

becomes an increasing aim of thegovernment. The risk of an economicslowdown and a reduction in supportprogrammes would have only a marginaleffect on imports, as the governmentwould remain incentivised to encouragedomestic consumption.

Grains and oilseeds In 2012, a record share of world grain exportswill come from the Black Sea region andSouth America, potentially surpassing theshare of the EU and the US (see Figure 2.12).This creates higher political risk and volatilityin markets as they grapple with the feast orfamine nature of exports from these rapidlydeveloping regions.

A large part of this political risk is derivedfrom the grains complex being regarded as a strategic national imperative, particularlytrue for the Black Sea region. This leaves agri markets increasingly dependent oninterventionist governments in the Black Sea region, the main exporters of which are Russia, Ukraine and Kazakhstan. Bestdemonstrating their potential forprotectionist actions were the export bansimposed by Russia from 2010 to 2011,Kazakhstan in 2008, and Ukraine in 2007 and 2010/11.

Additionally, the Ukrainian governmentrecently enacted laws to facilitate control overthe country’s exports in conjunction with arelaxation of export duties. The fact that CBOT Wheat prices rose 15.6% in the two days spanning the imposition of the Russianexport ban demonstrates the immediateimpact such moves can have on markets. This move came in spite of marketpositioning already anticipating a yieldreduction of 8% following the previousmonth’s USDA WASDE report.

As the trend towards an increasinglyimportant role of nontraditional and morerisky suppliers continues, substantial riskpremiums have been, and must continue to be, built into grain and oilseed prices.Increasingly strong buying from majorimporters will ensure that any supplydisruptions from these regions will be metwith significant price rises.

As marginal increases in world productioncome increasingly from countries with higherlevels of political risk, the market tends toapply higher risk premiums to prices in theshort term as the chance of supplydisruptions increases. We see this tendencybeing compounded by politicaloverreactions, mainly taking the form of


export bans, which loom large in the market’smemory following the measures taken byRussia in response to the 2010/2011 drought.Export bans should be seen as a likelyresponse to any significant deterioration ofthe domestic inflation picture in the Black Sea region.

A key threat to the global corn complex is the economic fragility of South America.Argentina in particular has experiencedconsistently high inflation, as well as regularprotests and export tariffs that prove acommon hindrance to trade and remain a risk for prices (see Figure 2.13). Having integrated into global export markets,Argentina and Brazil now have a critical pieceof world trade. In addition to political risks,both countries have large domestic marketsthey need to satisfy, and a very real riskremains that policies could be introduced to support domestic use in the event of asupply-side shock.

Chinese import policyThe Chinese government and its economy are perhaps more closely linked than those of any other major power and, as a result, the ruling party is able to exert more controlover agricultural trade flows than elsewhere.With this in mind, we believe there is moreimpetus for the Chinese government toincrease than to reduce imports of agricommodities in 2012.

We forecast a slowing rate of economicgrowth to have little effect, and it may evenstimulate import demand in the face ofcontinuing government rhetoric about foodself-sufficiency. This is driven by domesticpressure to see real wealth growth for thepublic at large and to hold political unrest atbay. Changes in China’s economic trajectory—

whether hard landing, soft landing ormaintaining the status quo—are likely to have a smaller effect on demand for importsthan is generally expected. We expect that the government’s bias in an environment of renewed world democratisation andseemingly less constrained domestic dialoguewill be towards increasing focus on street-level inflation and the price paid for food by the average Chinese citizen, reinforcing the status quo.

These effects are a big source of uncertaintyfor markets and are compounded by the factthat Chinese supply/demand balances arenotoriously opaque. Our analysis suggeststhat inventories of grains and oilseeds remain below levels we think the Chinesegovernment expects in order to meet theirgoal of enhancing domestic price stability.

West AfricaMost of the world’s cocoa supply is still drawn from West Africa, a region whichremains politically volatile and prone to civilwar as seen in 2010/11 in Ivory Coast, theworld’s largest cocoa producer. This politicalrisk remains, though difficult to quantify, withthe largest risk being the return of civil war tothe Ivory Coast, followed by the introductionof a central buyer there, as seen in Ghana, to provide price stability. The Ivory Coastgovernment can reasonably expect that mimicking the policy of its neighbour will limit the cross-border smuggling thatis currently taking place in order to takeadvantage of, or arbitrage, the pricedifferential between the two nations. The next obvious step is West African regionalintegration to form a cocoa OPEC, though we see the risk of this happening as minimal.


Figure 2.12: World wheat and corn exports by region, 1961/62-2011/12f

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Figure 2.13: Argentina’s inflation profile, YOY change in price indices, Dec 2000-Oct 2011

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The risks of production concentration in such volatile countries mean there is asignificant upside skew to the cocoa price,contingent upon changes in the West Africanpolitical situation.

Elections Elections provide significant scope, outside the expected changes to agriculturalpolicy, to catalyse protectionist policyimplementation for short-term economicgain. Any such policy action, be it new tariffsor accommodative domestic policy, can beeasily justified as responding to perceptionsof global economic uncertainty to ensuredomestic stability. We will monitor a numberof specific elections during 2012 in which we see potential surprises for markets andresulting price effects for agri commodities (see Figure 2.14).


Figure 2.14: Selected political events, 2012

Estimated date Assessed agri market impact

Event description

US 3 January Low First Republican party primary in Iowa

Egypt January-March Low Parliamentary election

Russia 4 March Low-moderate Presidential and local elections

US 6 March Low Super Tuesday, 10 states; Republican party candidate

Iran 29 March Moderate Parliamentary election

France 22 April Moderate Presidential elections, first round

France 10 June Moderate Parliamentary elections, first round

Mexico 1 July Moderate Presidential and parliamentary elections

India July Low Presidential elections (elected by parliament)

Kazakhstan August Moderate Parliamentary elections

Turkey August Low Presidential elections

Brazil 7 October Moderate Municipal elections, first round

Ukraine 28 October High Parliamentary elections

ChinaOctober 2012-March 2013

Moderate Communist party internal leadership selection

US 6 November Moderate Presidential, House and 1/3 of Senate elections

Ghana December Moderate Presidential and parliamentary elections

Source: Rabobank, relevant governments, Bloomberg, New York Times, 2011


Capacity constraintsSupplies of a number of agri commodities willremain historically low in 2012 as the world’scapacity to respond to elevated prices byincreasing production continues to beconstrained. Many agricultural marketsremain susceptible to supply-side shocks as inventory levels remain tight—though not at historical lows for most commodities—and high production costs, lack of landavailability and capital restrictions limit a recovery in inventories.

We forecast global ending stocks to decline in 2011/12 for five of the eight commoditiesincluded in our coverage, most notably incoffee (-24%), soybeans (-11%) and corn (-7%).More modest declines are forecast for wheat(-3%) and cocoa (-2%), while stocks areforecast to build for cotton (20%), palm oil (12%) and sugar (11%). Most of thecommodities for which we forecast to see adecline in stocks despite record high or nearrecord high production also experiencedsmaller incremental growth in production.This is unlike previous cyclical commodity bull rallies where production increased at a pace sufficient to meet growing demandand replenish stocks. Global grain and oilseed stocks-to-use ratio, for instance, have remained below the long-term averagefor the past 10 years, despite elevated year-on-year increases in production.

Much of the low-hanging fruit in terms ofproduction growth through land expansionand yield advancements has been exploited,causing output growth to be more expensiveand have a higher risk profile. In 2012, weexpect production growth will be hinderedby the limited availability of global arableland, which is causing the world to rely more

heavily on higher-risk production regionssuch as the Black Sea region. At the sametime, the break-even price in these countries,many of which are in historically low-costareas, is increasing as production costs riseand credit remains tight. We expect thesesupply constraints to be compounded by thealready low inventory levels, which willcontinue to be supportive of agri commodityprices in 2012 (see Figure 2.15). This is reflectedby our base-case price forecasts, where we expect to see a slight easing in mostcommodities, but a very soft landing withprices remaining at historically elevated levels.

Supply squeezeSupplies of most agri commodities leadinginto 2012 remain precariously tight with some at or near record low stocks-to-useratios. The USDA forecasts the world’s totalgrain and oilseed stocks-to-use ratio todecline in 2011/12 to below 20%—the lowestlevel since 2007/08. This is despite the USDA’sforecast for the global grain and oilseed areaharvested to increase by the largest amountsince 2008/09 and to reach a record large 755 million hectares. The primary driver acrossthe complex is the tightening of the cornbalance sheet for a third consecutive year,bringing the stocks-to-use ratio to the lowestlevel in nearly 40 years. The persistent lowlevel of global corn stocks in the face ofrecord high prices and production willcontinue to be a key price determinant acrossthe entire complex in 2012, despite a sharpyear-on-year increase in global wheatproduction. With corn production unable to surpass consumption for a secondconsecutive year, the ability to replenishinventories of crops which lost planted area to corn in 2011—as soybeans did—will alsobe challenged. As a result, we expect corn

Figure 2.15: Global grain and oilseed stocks-to-use and 5-year average YOY change in production , 1969/70-2011/12f


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to lead the grains and oilseeds complex for the beginning of 2012, keeping thesoybean-to-corn price ratio historically low and challenging wheat’s historicalpremium to corn.

Risk aversion may limit the amount of capital deployed to increase agri commodityproduction in 2012 (see Figure 2.16).Continued uncertainty surrounding theeconomic and political outlook for 2012 is likely to curb the amount of capitaldeployed in the global agriculture sector. At the farmgate level, producers will behesitant to invest in large purchases or landexpansion as they are uncertain of futurereturns. Political debates surrounding the continuation of many governmentprogrammes which support the agriculturesector further fuel this uncertainty. This themeof conservatism will play out more strongly in regions that are deemed to be higher riskby investors who are withdrawing fromemerging markets in a ‘flight to safety’. Froman agricultural perspective, this will impactthose countries that have shown the largestgrowth in production in recent years: theemerging markets. Additionally, a moreconservative outlook for the economicgrowth in emerging markets will likely limit the volume growth in loans to theagriculture sector.

Increased yield volatilityThe market share of global agriculturalproduction capacity in countries with higheryield variance will continue to grow in 2012.We expect the market share of regions withelevated production risks, such as the BlackSea region and Argentina, to rise further in2012. The production capacity in traditionalagri commodity producing countries (such

as Europe and the US), which also have thesmallest amount of production constraints,has flatlined, pushing an increased share ofproduction growth to countries such asRussia, Brazil, Ukraine and Argentina. The world’s reliance on these emergingagricultural producers is expected to increaseto a record high 18% in 2011/12, reducingtraditional exporting countries’ share tobelow 40% for the first time on record.

As their market share has increased in recentyears, so too has the variance in global yieldsfor corn, soybeans and wheat (see Figure 2.17).While it is still too early to determine yieldlevels for the 2012/13 crop, the outlook forwinter crops in the Black Sea region is alreadybeing closely monitored due to adverseplanting conditions. Over 30% of Ukraine’snew crop winter grain could be lost due tothe current drought.

As global agri commodity productioncontinues to expand into emerging markets,so too will the battle for acres which persistsin developed economies such as the US andthe EU. This battle is likely to intensify in 2012as the increase in grain area harvested in 2011(at the expense of oilseeds) did not result in asufficient production response to replenishstocks. Yet at the same time, the stocks-to-useratios of vegetable oils are likely to fall to theirlowest levels in nearly 40 years for a secondconsecutive season. This will likely causeending stocks of both grains and oilseeds in2011/12 to show a year-on-year decline forthe first time since 2003/04. We expect cornvalues to offer Northern Hemisphere farmershigher profits than other row crops, furtherreducing the area available to plant tooilseeds and cotton.


Figure 2.17: Global yield variance and production shares


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Figure 2.16: Brazil financial system loans to agriculture and YOY change in Brazil’s total area planted, 2002/03-2011/12f

Source: Rabobank, CONAB, Bloomberg, 2011

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Higher price floorsThe cost to produce agri commodities willcontinue to increase in 2012, raising farmers’break-even levels and creating higher floorprices. Higher production costs will limit thedownside price potential for most agricommodities in 2012 as prices must persistabove break-even in order to encouragefarmers to increase production. The cost to produce crops such as wheat and corn(globally weighted by production) hasroughly doubled over the past 10 years.Nearly all of the cost components—such asfertiliser, energy and land—are expected toremain elevated for the 2012 season. Not only have average global production costsincreased, but the gap between low-costproducing countries and marginal producershas also narrowed. For instance, the cost advantage of producing wheat in Russia as compared to the US fell from USD 250/hectare to less than USD 50/hectarein 2011. This trend of diminishing costadvantages of countries with a higher riskprofile is likely to continue in 2012, which will consequently limit their ability to offerexports at a discounted price relative tohigher-cost producing countries.

We expect this higher cost structure to persist in 2012, driven by higher energy pricesand strong farmer demand due to the highprofits achieved in 2011 (see Figure 2.18).Fundamentals in both the energy andfertiliser markets will remain supportive ofprices in 2012 as capacity growth is slow torespond to demand growth. Global fertiliserconsumption is likely to have risen 2.5% to176.4 million nutrient tonnes in 2011/12—asecond year of record high demand. Althoughwe do not expect fertiliser prices to reach newhighs in 2012, we do see further upside price

potential as prices still remain below thehighs achieved in 2008. Furthermore, thediminishing availability of new arable landwill push farmers to invest more in crop inputtechnologies such as seeds and equipment to increase production through higher yields.This more capital-intensive per hectare cost of growing crops against a backdrop of riskaversion by lenders will increase the priceincentive required by farmers.

Figure 2.18: Index of global corn and wheat production costs and prices, 2000-2011f

Source: Rabobank, IHS Global Insight, USDA, Bloomberg, 2011

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Section 3 Agri Commodity Outlooks | 21

Given the highly uncertain macro economicenvironment at present, we have decided to provide some scenario parameters for our price and fundamental forecasts this year. These three scenarios are provided to give some guidance on our level ofconfidence in our forecasts and the macro-level assumptions we have applied informulating these forecasts. Our base-casemacro and FX scenarios have been applied to our central forecasts for each of the various agri commodities.

Base case: Stumbling alongIn the base case, Rabobank’s macroeconomicsteam suggests that the most likely outcomefor the global economy in 2012 will be one of very weak but positive global economicgrowth. We apply this as the central driver for the base case in our commodity priceforecasts. A mild double-dip is expected in the major developed economies of Europeand the US, but importantly for agriculturaldemand, only a minor softening in growth is forecast for emerging-market economies. A lot will no doubt depend on the timing and effectiveness of a resolution of thetroubles in the euro area, which at this stagestill seems some way off. We assume that aworkable solution will be in place by Q1 2012and we factor in a break-up of the bloc as only a 10% to 15% probability. This scenarioimplies a modest reversal in investor moneyflows, but not a complete return to the risk-on environment of 2010. Significantrange-bound trading with choppy marketsand a lack of clear flat price direction would be likely.

We also adopt Rabobank’s global FXstrategists’ forecasts as our base case, whichshows limited moderation in the US dollarexpected against most currencies in 2012,although we factor in some upside relative to commodity currencies.

Our base case implies little impact ondemand from an agricultural perspective,other than perhaps a continuation of proteindemand substitution—from red meat topoultry—in the struggling developedeconomies. This scenario also assumes verylimited impact on agricultural demand fromemerging-market economies, with growthexpected to continue at trend levels, which issupportive for almost the entire agri complex.

High case: Recovery stronger and fasterthan expectedThe major assumption we factor into thisscenario is a quicker and stronger recovery inglobal growth conditions than we currentlyforecast. This would require a swift and clearresolution to the euro-area crisis, a reversal ininvestor money flows back into commoditiesand higher growth economies, and a return of confidence to global markets. In thisscenario, agricultural demand would remainrobust in both developed and emerging-market economies. We expect this scenariowould provide a stronger devaluation of theUS dollar as safe-haven assets are sold insearch of growth.

3 Agri Commodity Outlooks


Low case: From bad to worseThis is our downside scenario for worldgrowth and demand. Here we factor in aprolonged EU debt crisis, with the debtconcerns spreading to the core countries of the bloc. Contagion fears paralyse marketsin Europe with knock-on effects globally and sustained risk-off environment results.Importantly for our agri complex forecasts, in this scenario we factor in a substantialcontraction in emerging-market growthwhich would significantly crimp demand andimports of key agri commodities. Consumerswould be forced to transition to lower costsources of calories and proteins. In thisscenario, a stronger US dollar environmentwould likely persist in 2012 as liquidity andsafe-haven assets are sought by investors.

Section 3 Agri Commodity Outlooks: Wheat | 23

Lower wheat prices are forecast for 2012 thanwe have seen in 2011, however from currentspot levels our view is neutral. While a tightfeed-grain balance sheet is expected toprovide some support to wheat prices,particularly in the US, elsewhere we see thesharp recovery in wheat production having a bearish impact on prices, relative to thelevels achieved in 2011.

Wheat fundamentals on their own reflect abearish situation from current price levels;although high protein and high qualitysupplies are less abundant, there will beample supplies to meet global demand needsin the season ahead. The outlook for the2012/13 season is not so clear with winterwheat planting conditions in a number ofregions far from ideal.

CBOT wheat prices are forecast to average14% lower YOY in 2012 as sharply higherworld production results in strong exportcompetition and a build-up in inventories for the 2011/12 season. Our base case forwheat prices indicates a mostly neutral viewfrom current levels, following a strong sell-off in 2H 2011. We do not expect a furthercollapse in prices, while ample supplies will prevent upside potential, in the absenceof crop failure in 2012. A weaker US dollar—as outlined in our base-case macroassumptions—will likely provide somesupport for CBOT prices, while a lack of export competitiveness in the EU will see Matif prices under pressure. We do notanticipate significant variation between ourscenarios from the demand side of the ledger,with wheat demand relatively inelastic andgenerally a function of supply. The most

risk to our base-case forecasts come fromproduction uncertainty for the 2012/13season, with incremental wheat productionbeing generated in more politically volatile and less reliable climatic regions as discussedin our capacity constraints section.

Global wheat production is forecast toincrease 6% to 684 million tonnes in the2011/12 season, the second largest crop onrecord. With the Northern Hemisphere crop in the bin, the only production uncertaintyremaining at this stage of the wheat season is in the Southern Hemisphere countries ofArgentina and Australia. Despite the ongoingthreat from a strengthening La Niña weatherpattern, production in both countries doesnot appear at risk, and harvest is now wellunderway. However, global wheatconsumption is forecast to reach a recordhigh of 676 million tonnes in 2011/12, up 4% YOY—offsetting fewer supplies of feedgrains—which we expect will limit therecovery in global wheat inventory levels tojust a 2% increase YOY. Despite the increase in stocks, record high global wheat demand is forecast to keep the stocks-to-use ratiounchanged from last season at 30%. It isworth noting that this remains well off thelow of 20% in 2007/08 that triggered recordhigh wheat prices.

Wheat prices in the US are expected to bemore a function of the domestic corn marketand less affected by the global wheatdynamics than prices elsewhere. Tight corn fundamentals in the US, following the extreme heat of summer 2011 andsubsequent yield downgrades, are expectedto support US wheat prices as domestic prices

WHEAT

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Low caseSupport from coarsegrain markets fadesmore quickly thanexpected

At-trend exports fromthe major producersdrive 2012/13 globalstocks-to-use above 33%

Crop conditionsimprove in spring,and global yieldsexceed our sub-trend,base-case forecast

Base caseWheat prices continueto be supported bycoarse grain prices―particularly in the US

Global demandaccelerates in 2011/12,largely offsetting thefourth largest globalwheat crop on record

Poor winter wheatplanting conditions inthe US and Ukraineresult in sub-trendcrops―but not a totalcrop failure

High caseWinter wheatabandonment andyield deteriorationexceed expectationsas drought in thesouthern states of the US intensifies

Drought conditionsintensify, severelyaffecting crops in the Black Sea region

US corn fundamentalstighten more thanexpected, forcingprices into a rationing mode

Source: Bloomberg, Rabobank


decouple from the global market. The wheat-corn futures price spread—which traded atan unusual inverse throughout 2H 2011—will be important in determining how muchwheat works into the feed ration in theremainder of the 2011/12 season. Thepremium for corn prices over wheat (spot-price basis) during 2H 2011 reached thehighest level since 1995/96 and hasmaintained a premium for the longest periodin history. While this is unusual, we expect that corn prices will continue to trade at apremium to wheat for some time to come,given the fundamental differences. The USDAforecasts a 22% YOY increase in US wheatfeeding to 160 million bushels in 2011/12; this estimate remains well below the levelsreached in 2008/09.

Global supply of high quality and highprotein wheat is expected to remain relativelytight despite this season’s large global wheatcrop. Widespread flooding in key Hard RedSpring (HRS) wheat-producing states in theUS and Canada—particularly North Dakotaand Saskatchewan—resulted in widespreadabandonment in 2011, pressuring suppliesand resulting in a strengthening in theprotein price premium. This is reflected by the sharp increase in the spread between the MGEX and CBOT wheat futures markets.This spread is expected to remain elevated, at least during the first half of 2012, as tightsupplies and the need to encourage plantingsof spring wheat against corn and evensoybeans will likely support MGEX prices.

Sharply higher global wheat production isforecast to result in significant exportsubstitution from lower cost origins, but USwheat exports have been surprisingly resilientin the first half of the 2011/12 season. The

USDA is forecasting a 24% YOY fall in USwheat exports to the second lowest level of the last five seasons, while EU exports areexpected to drop 26%. Increased globalexportable supplies are the major driverbehind this shift in global demand, primarilyto the Black Sea region, where production hasrebounded 43% and export bans have beenrepealed following the 2010 drought. Despitethis impressive recovery in just 12 months,aggregate Black Sea region production isexpected to fall just short of a record in2011/12, although Kazakhstan is forecast toproduce a record crop of 21 million tonnes, a 116% YOY increase. We expect exports fromthe Black Sea region to reach a combined 38 million tonnes in 2011/12, the secondhighest aggregate for the region on record,and a 27% market share is forecast to be thelargest share of global trade from the regionon record.

Wheat exports from the US and the EU areforecast to represent a record low share ofworld trade in the 2011/12 season. Combinedexports from these two key regions areforecast to fall from 45% last season to just31% in 2011/12. Increased export competitionthis season has also been intensified bysizeable crops from both Australia andCanada. The Australian exportable surpluswas recently boosted by a stock revision ofaround 3 million tonnes and is likely tobenefit from the country’s largest wheat cropon record at a forecast 26.2 million tonnes. We forecast a record large national exportprogramme of 21 million tonnes for Australia, constrained only by domesticlogistics and increasing low-cost competitionfrom the Black Sea region into South EastAsian markets. Greater production in WesternAustralia this season should allow exports to

Source: Rabobank, USDA, Bloomberg, 2011

Figure 3.1: US all-wheat feeding and the wheat/corn spread, 2001/02-2012/13f

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Section 3 Agri Commodity Outlooks: Wheat | 25

exceed last season’s levels. Canadian exportsare forecast to jump 9.1% to 18 million tonnesdespite the growing uncertainty beingcaused by the expected abolishment of thesingle exporter policy next season.

European wheat prices look set to have themost potential for downside due to lower-cost export competition from the Black Searegion, although a weaker euro may provide a partial buffer early in 2012. European, andmost notably French, wheat exports slumpedearly in the 2011/12 season as Black Searegion exports dominated market share intothe key North African importer destinations,and we expect these exports will remainunder pressure in 2012. We expect EU wheatstocks to climb 13% YOY, likely boundingMatif futures prices well below the highs of 2011 and above the lows of 2009. A range of EUR 125/tonne to EUR 196/tonne isexpected, given the weaker fundamentalsituation next season.

Our initial estimates for 2012/13 suggest itmay be difficult to replicate this season’s near-record production next season as we modelarea planted globally unchanged to slightlylower on the basis of significantly weakerwheat prices year-on-year and increasedcompetition for planted area from other rowcrops. Assuming trend yield at this early stageof the season in most regions, our initialestimates suggest a 3% YOY decline in globalwheat production to 662 million tonnes in the 2012/13 season—still the fourth-largestglobal wheat averages on record. Adversewinter wheat planting conditions in Ukraine,and in the southern US due to ongoingdrought, suggest it will be difficult to achievetrend yield this season. Additional poor crop

conditions and sub-trend emergence levelsheighten the risk of crop losses in theseregions in 2012/13. This productionuncertainty is likely to provide some support to deferred contracts for both theMatif and CBOT markets; however, conditionsin the Northern Hemisphere spring will be the key in determining yields and production.Without a significant supply-side shock in2012/13, we do not expect prices to return to highs seen in 2010 or 2011.


Figure 3.3: YOY changes in Black Sea region, US and EU exports, 2008/09-2012/13f

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Rabobank forecasts lower year-on-year CBOTcorn prices in 2012. However, we do expect a seasonal uptick in prices, averaging USD 6.45/bushel in Q2 2012 before easing toUSD 6.10/bushel in Q4 2012. We expect thismid-to-late year fall will result from 2012/13acreage expectations being ratcheted higherin the US. Our forecast 2011/12 US cornending stocks-to-use ratio would be thelowest on record and provide strong pricesupport in the near term.

Q2/Q3 2012 corn prices will prove difficult toforecast as the US corn complex moves from a strong deficit to a moderate surplus, withprices highly path-dependent as the marketattempts to guide 2012/13 acreage in the US.Although a long way out, we see our cornprice forecasts likely to be more a function of South American weather and supplyexpectations for the US 2012 crop thaneconomic outcomes. Ethanol productionresponses to oil price changes remain ourmain mechanism to bring economicvariability into the corn complex.

Our low case would also involve the windingback of the increases in protein consumptionwe have assumed for the developing world. If weaker-than-expected growth outcomesare realised in the developed world, asassumed in our low case, we could see oilprices dropping below USD 100/barrel and a significant reduction in corn prices towards USD 5.00/bushel as ethanol demand is reduced. Under our high case,where the global economy experiencesresurgent growth, we would see higher oilprices, strengthening demand and rebuildingof stocks. These macro conditions would

see corn prices test USD 7.00/bushel duringQ2 2012.

Rabobank forecasts continued reductions to the USDA’s corn ending stocks projectionsas use creeps higher on strong ethanolmargins and relatively strong exports, whilesimultaneously, there is also a significant riskof further yield downgrades in the final 2011crop report due in January 2012. In broadterms, most categories of US demand havebeen strong or strengthening since the startof the 2011/12 marketing year in August. Weexpect that to continue, with total US corn use in 2011/12 forecast to reach 12.8 billionbushels, a 1.9% decrease from 2010/11 levels. Key risks to our forecast include thepossibility of negligible La Niña effects andsubsequently strong South American exports,as we currently forecast a lower exportoutcome than the USDA for the continent.Fundamentals show oil prices to be a keydriver of future corn prices, as we foreseegreater corn demand from ethanolproduction than the USDA for 2011/12 and further increases in 2012/13. Margincontractions from falling oil prices are a key risk to our forecast.

The ongoing role of speculative/managedmoney in the agri complex,�and in cornmarkets more specifically,�will play animportant role in price discovery for corn inthe coming year. Current net long positions of managed money are near the lows set inJuly 2010, and we expect it to be difficult forsignificant liquidations in speculative net long positions to occur from these levels asstructural longs remain. Analysis of origin-buying suggests a price floor of approximately

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Low caseCorn plantingsexceed 95 millionacres in the US, withprices falling to USD5.00/bushel on recordcrop expectations

Importer demand isweaker amideconomic downturn;USD rally hindersexports

Weak La Niña helpsSouth American cornexports hit 34 milliontonnes

Base caseFurther US corn yield reductionsforce increasingreliance on volatileemerging-marketexports

Ethanol productionhits record levels,despite blenders’credit lapsing at the end of 2011

China imports 4 million tonnes of UScorn despite recorddomestic crop

High caseNew crop US cornacreage is less than93 million acres andyields disappoint

Policy changesrestrict Ukrainian/Argentine cornexports

High oil prices andlow USD, drive USethanol demand to5.2 billion bushels


Section 3 Agri Commodity Outlooks: Corn | 27

USD 6.00 will hold until 2012/13 crop acreageand conditions are well established.

Further out the curve, our downward bias for prices strengthens with the 2012/13marketing year likely to produce the largestglobal corn crop on record. Rabobankprojects that an equal record of 93.5 millionacres will be planted in the US, furtherdisplacing soybeans as producers capitaliseon strong price incentives and increase cornacreage in marginal production regions.

Our state-by-state models suggest that themajority of the 1.7 million planted acreageincrease will be from nontraditional producer states.

We forecast an additional 850,000 acres of corn to be planted in North Dakota as itrecovers from the severe flooding of 2011.There is significant income risk as farmersplanting corn for the first time receive cropinsurance returns in line with county yieldsrather than proven yields. This uncertainty,along with resilient spring wheat prices, caps our expectation of increasedsubstitution in North Dakota.

Although a long way off, we forecast US yields of 154 bushels/acre based on our state-by-state model. This figure wasimpacted by the increased acreage frommarginal states. Following this, our production forecast is 13.25 billion bushels, a 7.9% increase on our 2011/12 forecast.

We forecast a record 5.1 billion bushels of corn to be used in ethanol production during the 2011/12 marketing year asdistillers operate on strong margins at fullpace despite the risk caused by the imminentwithdrawal of the blender’s credit. Corn usefor ethanol production in 2012/13 is likely to

reach 5.2 billion bushels as corn acreage isexpanded at the expense of soybeans, withour forecast near-term futures price ratiobetween the two commodities continuing to favour corn. Given unchanged oil prices,ethanol production should remain nearcapacity and meet our forecast, as cornremains in the USD 6.00/bushel to USD 7.00/bushel range. Our base-caseeconomic growth assumptions would,without increased disturbance in the Middle East, see Brent Crude oil prices stay in the USD 100/barrel to USD 110/barrelrange during 2012.

US corn export sales, with a strong pace set for 2011/12, should be supported by aweakening US dollar. We forecast exports to be 1.62 billion bushels, 25 million bushelsahead of current USDA expectations. Thereremains a risk that sales are cancelled asbuyers switch to cheaper origins once cropsare more certain. Structural factors such as China’s ability to import only US corn as well as geographical advantages inexporting to Mexico, where a drought isforecast to have reduced the 2011/12expected crop by 3.5 million tonnes fromprior USDA estimates, should support export sales in Q1 2012.

Rabobank forecasts that the USDA will have to increase feed demand to 4.7 billionbushels from the current 4.6 billion bushelestimate. The November WASDE report stated that the USDA has underestimated US domestic corn demand in 20 out of 30 years of analysis, which Rabobankconsiders worth highlighting. The averageerror is 215 million bushels. This supports our view that domestic use estimates will be increased in the new year. We forecast 4.5 billion bushels of US feed demand in

Figure 3.6: Matrix of estimated ethanol production profitability(in USD/gallon)

Brent crude price(USD/barrel)

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Ethanol price1

(USD/gallon)2.05 2.28 2.52 2.76 2.99

Corn price(USD/bushel)

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6.0 -0.15 0.08 0.32 0.56 0.79

6.5 -0.34 -0.10 0.13 0.37 0.61

7.0 -0.52 -0.29 -0.05 0.19 0.42

1RBOB gasoline/Brent crude relationship based upon OLS regression Figure assumes a DDG price of USD 220/tonne and an RBOB gasoline/ethanol spread of USD 0.10/gallon.

Source: Bloomberg, USDA, Rabobank Source: Rabobank, USDA, 2011

Figure 3.5: US corn planted area and yield, 2000/01-2012/13f

mill

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re

Area planted Yield (RHS)

70

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2012/13 as DDG substitution increases andthe cattle herd shrinks.

Our global production outlook for corn in2011/12 is relatively large from a historicalperspective, with Brazil, Ukraine andArgentina helping to moderate weakenedexpectations for the US crop, albeit withgreater downside risk than seen in previousyears. Although record crops are expected in many countries, world trade (excluding the US) during the remainder of the 2011/12 marketing year is likely to see supply availability skewed to the downside as political considerations operate inconjunction with uncertain environmentaloutcomes. In addition, we see potential foryields in Argentina to be reduced by anadverse La Niña weather pattern.

We expect 27.5 million tonnes of corn to be exported from South America in 2011/12. Argentina continues to operate in a pressured economic environment withpersistently high inflation and persistentgovernment intervention in the foreignexchange market. Further economic stressmay promote more widespread industrialaction, causing substantial stress to a worldcorn complex which relies on strongArgentine exports. We will monitor this closely and adjust our forecasts as necessary.

In a year of a record corn production,Ukrainian exports remain uncertain with theUSDA currently expecting 12 million tonnesto be exported in the 2011/12 marketing year.Our analysis suggests 11 million tonnes willbe more realistic, with 9.5 million tonnes our low case, which would put significantupward pressure on corn prices. Given theneed to raise the government-mandatedexport cap of 10.5 million tonnes to meet

either our or the USDA’s forecast, there will be some form of governmentintervention. We see several likely catalysts that could bring further exportlimitations into effect:

• The government decides that domesticprices are too high and acts to supportdomestic consumption,

• The current poor outlook for the 2012/13wheat crop deteriorates further andresulting export bans cover the entiregrains complex,

• No IMF funding deal is struck and theUkrainian government sees the recordhigh price for exports and re-introducestariffs to assuage cash flow issues.

Rabobank forecasts 2012/13 will see global corn production of 885 million tonnes, a 3.4% increase on our 2011/12forecast and the highest on record. Thisforecast builds on our greatly increasedacreage figure for the US and sees an extra 3 million tonnes in exports from South America as soybeans are displaced in a situation analogous to that in the US.Ukrainian production estimates are tempered by strong incentives to plant more barley and sunflower and consequently, we have reduced our exportforecast to 9.3 million tonnes for 2012/13. We expect global corn trade to be resurgentas China imports a record 7 million tonnesand the world economy pulls itself to its feet. At this point, we forecast ending stocks to be 123.8 million tonnes with a stocks-to-use ratio of 12.6% relieving some of the pressure we forecast ahead for 2011/12.


Figure 3.7: Global corn exports, US vs ROW, 1972/73-2012/13f

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US Rest of world share of exports (ROW)ROW

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986

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582

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774

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3

Section 3 Agri Commodity Outlooks: Soybeans | 29

Soybean prices in 2012 are poised to fall fromthe levels seen in 2011 but are likely to remainhistorically elevated even though slowingglobal growth threatens to temper demand.Our base case shows significant upside fordeferred prices from spot, as soybeansstrengthen relative to corn in 2H 2012. Basedon our low case, we view soybeans as themost defensive commodity in the grain and oilseed complex, given their relativeunderperformance in 2011 and the largeemerging-market demand profile. However,with our forecast for lower corn prices in 2012, we expect the spillover bullishsentiment which was a key driver for soybean prices during 2011 to fade.

Yet a floor price will be set based on SouthAmerica’s production costs and Chineseimport demand, as US farmers plant a recordlarge corn acreage in 2012/13 largely at theexpense of soybean area. We expect this willcause the US to concede its position as theworld’s largest soybean exporter to Brazil for a second consecutive year and will shift priceseasonality to reflect South America’s cropcalendar. Consequently, we believe thesoybean-to-corn price ratio will reverse fromhistorically low levels as early as Q2 2012—albeit at lower absolute year-on-year values.This lower price outlook for soybeans in 2012will be limited, given the supply constraintsinherent in soybeans’ expansion into newterritories which have a higher break-evenprice floor and higher political risks. Downsideprice risk will also be mitigated by therelatively inelastic biodiesel demand for soy oil and by China’s declining soybeanproduction, which will be supportive of its need to increase imports year-on-year.

Based on our analysis of the corn balancesheet, we forecast corn prices will continue to outperform soybean prices during thebeginning of 2012 as corn must win the USbattle for acres. We expect soybean plantedarea to lose more than 1 million acres to cornand decline to 73.9 million acres in 2012/13—the smallest area planted since 2007/08. A rebound in soybean yields to a trend of 44 bushels/acre would mitigate the drop inplanted area, resulting in a 5% YOY increase inproduction to 3.21 billion bushels. This wouldcause the market to be even more sensitive to adverse weather developments as a resultof yields playing such a pivotal role indetermining whether or not US soybeanproduction will increase in 2012/13 or declinefor a third consecutive year. This 5% YOYincrease in US production would allow USexports to increase by less than 5 milliontonnes—far below the average annual paceneeded to reach the growing Chinese importdemand. This will require South America toincrease production in 2012/13 by at least 2 million tonnes in order to prevent a furtherdrawdown in global soybean ending stocks.

The ability of global soybean production to grow in 2012/13 is likely to be affected by South American capacity constraints.Favourable weather and increased soybeanplantings in Brazil are supportive of recordhigh production and exports available fromSouth America for 2011/12. We forecast thecombined soybean production of Brazil,Argentina, and Paraguay to reach a recordhigh of 134 million tonnes in 2011/12, furthersolidifying the region’s importance in meetingglobal demand. However, there are signs thatthe pace of land expansion is slowing in Brazil

SOYBEANS

12-month outlook from spotUSc/buUSc/lbUSD/ton

Q3’11

1,35855.8230

Q4’11f

1,16549.4300

Q1’12f

1,17848.7310

Q2’12f

1,22650.2290

Q3’12f

1,26049.1330

Q4’12f

1,25147.5335

CBOT

SoybeansSoy oilSoymeal

900

1,000

1,100

1,200

1,300

1,400

201220112010

USc

/bu


Low caseRecord large US cornharvest results in our low-case cornprice level of USD 5.00/bushel

Chinese imports fallbelow the USDA’s56.5 million tonneforecast in 2011/12

US soybean 2012/13planted area remainsflat YOY or risesabove 75 millionacres

Base caseUS soybean plantedarea declines to a 5-year low of lessthan 74 million acresin 2012/13

The South Americanexportable surplus is record large at 56 million tonnes in 2011/12

Chinese import growth accelerates 12% YOY in 2011/12 to58.5 million tonnes

High caseChina’s imports grow 15% or moreYOY and exceed 60 million tonnes

South Americanproduction below133 million tonnes

USD 1/gallonbiodiesel creditextended in 2012



and Argentina, creating a biannual battle foracreage. From 2000/01 to 2007/08, thecombined harvested soybean area in thesethree countries increased by an average of 7% (even when accounting for a year-on-yeardecline as a result of the global financialcrisis). Since then, harvested soybean area has only risen by an average of 4%. As farmersslow the pace of their land expansion, thebattle for acres between major row crops inBrazil, which has prevailed for many years inthe US, is clearly becoming a biannual event.For instance, in the Brazilian states thattypically produce the highest soybean yields (such as Paraná), corn plantings haveincreased at the expense of soybeans in2011/12. Although the increase in cornplantings has not been enough to cause total soybean area to decline in year-on-yearterms—in fact we expect the Braziliansoybean harvested area will reach a recordhigh in 2011/12—it does signify that thecapacity to augment soybean supplies isbecoming increasingly constrained. As aresult, a higher floor price will be needed to incentivise the increased productionnecessary to replenish the global soybeanbalance sheet in 2012/13.

We believe that in order to offer SouthAmerican farmers the profit margins requiredto further expand soybean planted area in2012/13, CBOT soybean prices must remainabove USD 10/bushel in Q3 2012—which isroughly the break-even cost needed to bringon new soybean area in Brazil. Although Brazilis positioned as a more cost-efficient soybeanproducer (particularly because their yieldshave been larger than those of US farmers for the past two seasons), this gap is quicklyclosing. Rising land values, currency

appreciation and higher input costs arereducing the cost advantages of expandingsoybean production in Brazil. Since we expectthe Brazilian real to remain volatile andstronger in 2012, the cost advantage ofbuying inputs in domestic currency whileselling crops in US dollars is diminishing.Consequently, incentivising Brazilian farmersto undertake further acreage expansion willrequire a higher CBOT soybean price. Forinstance, in the state of Mato Grosso, wheresoybean production growth increased themost in 2011/12, the cost of production forsoybeans was less than USD 9/bushel. Whentransportation to port is included, costsincrease to USD 11/bushel. We expect thisbreak-even cost to increase in 2012, which willgive CBOT soybean prices limited downsidebelow the USD 11/bushel, based on ourforecast for the Brazilian real to remain strongduring 1H 2012 before declining in 2H 2012.

The demand profile for soy oil may potentiallydiverge from soymeal in 2012 as the growthin demand for biodiesel and emerging-market food consumption of soy oil outpacesthe growth in feed demand for soymeal. Webelieve soy oil prices are least exposed to thepotential economic slowdown in 2012 due totheir smaller exposure to EU and US markets,which account for one-quarter of totaldemand as opposed to their more than one-third share of demand for soymeal. This exposure can be further reduced to 18% if the relatively inelastic demand ofbiodiesel is excluded.

In our low case, in which economic growth in developed economies significantlyunderperforms that in emerging markets, soyoil prices would perform comparatively well,given their large exposure to emerging


Figure 3.8: US soybean area planted and production, 1998/99-2012/13f

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Figure 3.9: Corn and soybean area harvested in Brazil and Argentina and ratio of soybean/corn area harvested, 1987/88-2011/12f

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8

Section 3 Agri Commodity Outlooks: Soybeans | 31

market economies. US soymeal demand isforecast to fall for a fifth consecutive year to the lowest level since 1999/2000 due torelatively flat year-on-year grain-consuminganimal units and the increased availability ofDDGs. The volume of DDGs which substitutestotal soymeal feed demand is estimated to be 20% to 30%. This implies that animal feed demand for US soymeal could havepotentially reached a record high in 2010/11were it not for the displacement by DDGs inthe feed ration. With our forecast for anotherrecord-breaking year of ethanol production in 2011/12, soymeal demand will continue to decline.

The degree to which the soy oil shareincreases hinges largely on the outlook for biodiesel production (primarily in the US) with significant downside, given thelikelihood that the USD 1/gallon tax incentivewill expire at the end of 2011, as well asupside risk if energy prices rise significantly in2012. US biodiesel producers achieved recordhigh profit margins in 2011, which are likely to deteriorate in 2012, causing year-on-yearproduction decline to be the third highest on record. This will be more than offset by anincrease in production in Brazil and Argentina,where mandates have been increased to B5 and B7, respectively. Brazil may potentiallyincrease their blend requirements to B7 onthe way to B20 by 2020.

The largest downside price risk to soybeanswill be the potential for China’s demandgrowth for soybeans to slow or decrease in2012 should the global economic situationdeteriorate, as in our low case, and threaten aslowdown to China’s economy. In 2007, whenChina’s food inflation skyrocketed, consumersresponded by decreasing their per capita

consumption of animal protein. Food inflationduring 2011 has not reached the same levelsseen in 2007 (in fact it has started to declineat the end of 2011) but remains historicallyelevated. China’s food inflation has largelybeen driven by pork prices, which reachedrecord highs in 2011 as disease reducedavailability. This, in turn, gave farmers a priceincentive to increase pork inventories, whichwe view as supportive of China’s soybeanimport demand in 2012. The outlook for soyoil demand growth is also uncertain for 2012as crush margins have remained negativedespite the government’s removal of pricecaps. Yet, we expect China’s year-on-yeardecline in soybean production in 2011/12 willcontinue to be supportive of soybean importdemand. The uncertainty lies in the extent towhich China’s demand will increase, whichwill largely depend on how the globaleconomic situation unfolds.

Figure 3.10: Combined US, Brazil and Argentina soy oil exports and industrial domestic use, 2001/02-2011/12f


Industrial domestic useExports

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Figure 3.11: CBOT soy oil share of crush margin, Jan 2002-Nov 2011

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Global production of palm oil is poised foranother year of growth in 2011/12, surpassing50 million tonnes for the first time in history,allowing prices to ease and spurring demand.While in isolation this would signify a bearishprice reaction, declining availability ofalternative vegetable oils will continue tocreate an elevated increase in global demandfor palm oil and prevent a significant build-upof ending stocks. We expect the increase inpalm oil production to be largely weighted atthe beginning of the marketing year, drivenby harvest seasonality and the potentialnegative impact of La Niña.

Malaysia’s palm oil production—whichconstitutes 44% of global exports—hasoutpaced its 12-month moving average sinceMarch 2011, rising to the second-highestmonthly level on record in October at 1.91 million tonnes. At the same time, stocksrose to the fourth-highest level on record.Going forward, we expect that productionseasonality and detrimental weather couldpotentially cause monthly output to fallnearly 20% below the 12-month movingaverage. This will be partially offset by theelevated stock levels, but a larger-than-expected export pace or La Niña could givefurther upside potential to our price forecasts.

Our base case prices factor in continuedstrong global demand growth for vegetableoils, which will be supportive of palm oilprices in 2012, driven by increased biodieselproduction, Chinese demand and weatherrisks. Across the oilseed complex, we expectthe oil share to perform particularly well in2012 as the demand profile for oils versusmeals diverges further. The output of

alternative vegetable oils is forecast to declinein 2011/12, which will benefit palm oil as endusers seek lower cost alternatives to soy oiland rapeseed oil. Although it is likely thatprices will be pressured in the short term, weexpect the seasonal slowdown in palm oilproduction during 1H 2012 to lead to a pricerebound in 2H 2012.

The biggest downside risk to our priceforecast for palm oil in 2012 is the political risksurrounding biodiesel production, whichaccounts for approximately 12% to 13% ofglobal vegetable oil consumption. Our lowcase prices assume a curtailment in mandatesor financial incentives for biodieselproduction in major soy oil exportingcountries in 2012, which would increaseexportable surpluses of commodities such as soy oil and rapeseed oil. On the other hand,as vegetable oils have become increasinglycorrelated to oil prices in recent years, this link to energy markets also gives potential for price upside in 2012 in our high case.

Global palm oil demand is largely driven byconsumption in China and India where wesee a relatively smaller risk of economicslowdown in 2012. China’s palm oilconsumption has only shown year-on-yeardeclines in two of the past 15 years, with lastseason marking the largest year-on-yeardecline over this time period. It also markedthe slowest year-on-year percentage growthin China’s total vegetable oil consumption in15 years, which we expect will result in arebound in 2011/12. Food-price inflation hasbegun to decline in China, and crush marginshave become less negative. As in past years ofreduced demand growth, we expect this will

PALM OIL

12-month outlook from spotQ2’11

3,365

Q3’11

3,100

Q4’11f

3,000

Q1’12f

2,800

Q2’12f

2,900

Q3’12f

3,000

Q4’12f

3,100

MDE-BURSA

MYR/tonne

2,000

2,500

3,000

3,500

4,000

201220112010

MY

R/t

on

ne


Low caseExports of rapeseedoil and soy oilincrease in 2011/12as opposed to ourforecast for a decline

Weak economicgrowth in China andIndia causes theirimport demand todecline YOY

Energy prices falland reduce biodieseldemand to less than12%-13% of globalvegetable oils

Base casePalm oil productiongrows 5% YOY in2011/12 to more than50 million tonnes

Global soy oilexports fall to 9.3million tonnes―thelargest YOY declinesince 2008/09

Global palm oilstocks-to-useincrease YOY in2011/12 to 11.4%but remainhistorically low

High caseLa Niña strengthenswith a negativeimpact to palm oilyields in Malaysiaand Indonesia

Oil prices rise andspur increasedbiodiesel productionin the EU/US

Global soybeanproduction does not increase 2% asforecast for 2012/13


Section 3 Agri Commodity Outlooks: Palm oil | 33

cause China’s demand growth for palm oil torebound in 2011/12. Using a conservative 5%YOY increase, this would push China’s palm oil imports to a record high of more than 6 million tonnes. However, there may beconsiderable upside to this assumption,particularly as the last year-on-year decline,which occurred in 2001/02, was met with a more than 1 million tonne increase in2002/03—making even the USDA’s forecastfor a 7% YOY increase look conservative. Wesee less risk of a slowdown in India’s palm oilimport demand as they have shifted toincreasing reliance on palm oil in order tofulfil vegetable oil demand, which is poised to expand to a record large 46% of the total in 2011/12. In our view, palm oil imports toIndia have a larger risk of falling short ofexpectations than those to China given therelatively strong domestic oilseed production

in 2011/12. However, relative to other agricommodities, this demand profile is less atrisk for a decline based on our economicoutlook for 2012.

Palm oil prices will continue to beunderpinned by soy oil prices and, to a lesser extent, rapeseed oil prices. In our view, palm oil’s price discount relative to soy oil will continue to find resistance aboveUSD 300/tonne—a level not surpassed sincethe global financial crisis in 2008. End-userswere aggressive buyers of palm oil in 2011 asits discount dropped below USD 150/tonne.We believe this price relationship will persistin 2012, keeping price movements in palm oildependent on developments in the broaderoilseed and vegetable oil complex.

We expect that the year-on-year decline in US soybean production in combination with

Figure 3.12: Monthly Malaysia palm oil production and 12-month moving average, 2000-2011

Source: MPOB, Bloomberg, Rabobank, 2011

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0.6

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2000

Figure 3.13: Palm oil and Brent crude oil prices and correlation, 2001-2011


corr

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ces

Correlation Brent crude oil price, USD/bbl (RHS)

MDEX palm oil price, tens of USD/tonne (RHS)

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Figure 3.14: Palm oil and soy oil prices and spread, 2000-2011


USD

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Figure 3.15: YOY change in global vegetable oil exports, 2000/01-2011/12f

Source: USDA, Rabobank, 2011

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increased biodiesel consumption in the US, Brazil and Argentina will reduce globalexportable surpluses of soy oil by 6% in 2012.Rapeseed oil availability will also be reducedas global rapeseed production falls by morethan 7%—a result of a second consecutiveyear-on-year decline in rapeseed yields. Asthese production shortfalls are met withcontinued demand growth, palm oil willaccount for a record large share of the world’svegetable oil use in 2011/12 at more than34%. As a result, we expect that the recordlarge palm oil production will fail to create a substantial build-up in ending stocks and will require prices to remain elevated in 2012in order to prevent demand from increasingabove current expectations. We see thepolitical uncertainty surrounding biodieselproduction as the biggest downside risk to our price forecast, particularly the USD 1/gallon tax credit for US producerswhich is set to expire at the end of 2011.Weather poses the largest upside risk to ourprice forecast as a strengthening La Niñacould reduce palm oil production in thecoming months more than expected or cause South America’s soybean yields to fall below trendline.

Section 3 Agri Commodity Outlooks: Sugar | 35

We forecast lower international sugar prices in2012 as the market shifts into a surplus for thefirst time in three seasons. With global endingstocks expected to increase above the 10-yearaverage for the first time since 2008/09, weanticipate NY raw sugar prices will ease andreach an average level of USc 0.22/pound inQ4. Even with the 6 million tonne surplusforecast for 2011/12, we expect volatility toremain elevated and the current risk premiumto linger until mid-year when crop sizes aremore certain. In our view, the forecastincreased supply will result in lower prices,but a number of supportive factors willprevent the collapse of values. Increaseddemand from global importers and theethanol industry in Brazil are anticipated to bemajor supportive factors in the new season.Also, the forecast surplus will not be enoughto replenish the 19.8 million tonnes of deficitof the past three seasons, and while thestocks-to-use ratio is expected to increase in2011/12, it is forecast to be five percentagepoints below the 10-year average.

Given our bias for easing sugar prices in 2012,we expect the buying support to grow andremain resilient even in the case of awidespread economic downturn. Our forecastdemand growth in 2011/12 of 1.6% is afunction of lower prices encouraging buyingand is up from the 0.8% increase in theprevious season. When the sugar market wentinto deficit from 2008/09 to 2010/11, annualdemand growth averaged only 0.3%. Weforesee the need for many internationalbuyers to come on the market in 2012 torestock diminished inventories. In our view,the elevated prices of the past season—the

ICE #11 contract averaged USc 28/pound in2009/10—resulted in a stock drawdown andpushed users to rely on inventories and hand-to-mouth buying. The pent-up demandsurfaced as prices fell in late 2011, and weexpect further demand increases in 2012.

In our view, the dominant factor in the sugarmarket in 2012 will be the improved supplysituation, a function of larger crops outside of Brazil, and likely a reaction to higher prices of the past two seasons. Our forecastfor total global sugar production in 2011/12 is 174.5 million tonnes, up 5% from theprevious season and the fourth consecutiveincrease. Better beet crops in the EU andRussia, as well as increased production inThailand and India, resulted in 6.2 millionmore tonnes of sugar, enough to offset thelack of growth in Brazilian production year-on-year. With the largest surplus forecast for2011/12 since 2006/07, when prices averagedUSc 10.3/pound, we expect prices on the NYmarkets will struggle to remain above the USc 25/pound level in 2012,assuming benignweather conditions and no major negativeweather events.

The demand for ethanol in Brazil and thecompetition between Brazilian drivers andglobal sugar importers is expected to be amajor factor in downside support for thesugar price in 2012. The size of the 2012Brazilian cane crop is the most importantvariable in the equation of how much sugarwill be available for export and how much will be available for biofuel use, but the pricesof the products will determine the share ofthe cane crop devoted to each. Our earlyprojections suggest the Centre/South cane

SUGAR


24

Q3’11

29

Q4’11f

24.5

Q1’12f

23.5

Q2’12f

23

Q3’12f

22

Q4’12f

22

ICE

USc/lb

0

5

10

15

20

25

30

35

201220112010

USc

/lb


Low caseThe 2012 BrazilianCentre/South canecrush exceedsexpectations: largersurplus, weaker prices

International demandexpectations fromChina are not met:larger domestic cropsuffices, government-buying wanes

Deteriorating economicconditions result ininvestor liquidation in futures markets

Base caseLarger NorthernHemisphere andIndian crops shiftglobe into a surplus,weighing oninternational prices

Ethanol demand in Brazil and tightinventories temperdownside bias

Demand is robust asprices fall and usersrestock

High caseNew season crop defiesexpectations; lower-than-expected Thai,Indian or Braziliansupplies cause a smallersurplus/4th consecutivedeficit season

Policy action supportsmarket; Indian or EUgovernments allowsmaller exports thanexpected

Investor confidencereturns and the sugarmarket is viewed asundervalued, leading to buying



harvest could be slightly lower than 500 million tonnes, up from the 2011 estimateof 490 million tonnes, but still below therecord of 556 million tonnes reached in2010/11. The early projections of cane supplysuggest the market for ethanol will be tightand that there will be strong competitionbetween the two products.

How much of the cane crop will be used to produce ethanol is a function of theinternational price of sugar and the USD/BRLexchange rate. If the ICE #11 contract falls toofar, mills in Brazil will focus on ethanol insteadof sugar, assuming a fixed currency exchangerate. We estimate the current price level formills to change from sugar production toethanol production at near USc 22/pound. In the medium term, we assume this supportlevel will fluctuate between USc 18/poundand USc 22/pound. In our view, there will be strong support in the international sugarprice at levels that encourage ethanolproduction over sugar production. Given ouroutlook on ethanol prices, we forecast thissupport level to be near our USc 22/poundprice forecast for raw sugar. Looking furtherout the curve, the growing flex-fuel fleet inBrazil and diminished investment in sugarcapacity will likely keep the domestic markettight. The government has implementedsome legislation to support ethanol outputand has threatened more policy measures,but in our view, the main deciding factor inthe production of ethanol will be the price of sugar on the NY market. A shortfall of sugarfor ethanol on the Brazilian market due toelevated sugar prices may result in furthercorn ethanol imports from the US as in 2011.

Chinese sugar inventories are at very lowlevels currently, and government-buying will

likely be another supportive demand-sidefactor in 2012. In 2011/12, Chinese sugarproduction is forecast to increase 9% from the previous season on better weather and an increase in planted area. Domesticconsumption is forecast to increase 2.3% in2011/12 with the domestic crop representing81% of total demand. Depleted stocks and the expected domestic deficit of 2.0 million-2.5 million tonnes mean that imports areforecast to rise to 3 million tonnes, up from2.8 million the previous season.

In our base case prices, we see strong supportfor raw sugar values, given the expectationsfor demand growth and the modest build-upof stocks. We forecast prices to average USc 23.5/pound in 2011/12, a historically high price, but down USc 4.5/pound from theprevious season’s average. We see downsiderisk bias being moderated by demandexpectations and the increasing competitionof ethanol for cane sugar in Brazil.

In our high case, better economic growth and a weaker devaluation of the US dollar will add further support for the sugar market.With a stronger US dollar, the value of sugar in Brazilian reais will fall, meaning thatinternational futures contracts—all priced inUS dollars—will have to increase to offset thefalls in real value for Brazilian mills. Speculatorinterest in sugar could also add a supportiveelement if economic growth expectations arerevised higher; the speculator net longpositions were heavily liquidated in 2H due toheightened market uncertainty. Speculatorsmay increase the net long position if bullisheconomic growth triggers a risk-onenvironment but we expect this to betempered by the better supply expected in the new season.

mill

ion

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es

raw

val

ue

Figure 3.16: Global sugar production and surplus/deficit, 2000/01-2011/12f

Source: Rabobank, FO Licht, 2011

ProductionSurplus/deficit

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Figure 3.17: Brazilian ethanol and sugar price inter-relationship


Sugar equiv. (BRL1.75/USD)Sugar equiv. (BRL1.60/USD)Sugar equiv. (BRL1.90/USD)

Anhydrous ethanol price (BRL/L)

14

16

18

20

22

24

26

1.40 1.30 1.20 1.10 1.00 0.90

Section 3 Agri Commodity Outlooks: Sugar | 37

In the sugar futures markets, prices have beengreatly impacted by macro concerns in 2011,and this is expected to remain a major pricedriver in 2012. If further negative macroevents occur and our low case of risk-off and a higher US dollar becomes reality, sugarprices could over-correct as they did in May 2010 when they fell to USc 13.67/pound.The speculator net long position, while lowrelative to historic averages, could still beliquidated further, putting major pressure on prices. A stronger US dollar environmentwould also be unfriendly for internationalprices. However, even with negativeconditions, the lower prices would likelygenerate increased buying support.

We anticipate high volatility in 2012, whichwill partially be a function of heightenedpolitical risk which remains a dominantfeature of the global sugar market. While weforecast a larger crop for India in 2012 and thepotential for 4 million tonnes of exports, theIndian government policy of allowing exportsonly when domestic supply is assured, andgenerally in incremental amounts, increasesuncertainty on the global market. The EU isalso expected to influence the internationalmarket with government action as the blocmay face a shortage of sugar in 2012 withimports unlikely to reach demandexpectations. The domestic EU crop in2011/12 is forecast at 17.4 million tonnes, upfrom 15.1 million tonnes the previous season,but this additional supply is out of quota and cannot therefore be used for humanconsumption. Given the supply issues the EU experienced in 2011, we anticipate policyaction if a shortfall is expected, but what theEU will do, and to what extent, is unknown.

tho

usa

nd

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ntr

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USc

/lb

Figure 3.18: No. 11 Sugar managed money net long position and price, 2000/01-2011/12f

Source: Rabobank, CFTC, Bloomberg, 2011

No. 11 Sugar price (RHS) Managed money net long position

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Coffee prices are forecast to fall in 2012 due to the large harvests expected in Brazil andVietnam, but diminished stocks will keep risksskewed to the upside. Unlike after past coffeeprice rallies, we do not foresee a collapse ofprices as it will take a couple of seasons toreplenish stocks and reverse the decade-longtrend of falling stock levels. The stocks-to-useratio has fallen from 44% in 2002/03—theheight of the coffee crisis—to our forecast18% in 2011/12, the lowest on record. Strong global demand is also supportive of prices and continues to grow at a brisk2.5% annually.

We anticipate the 2011/12 coffee season willbe characterised by razor-thin stocks and highrisks, but in our view this is a turning point in a decade-long trend of shrinking supply. Evenwith a large Brazilian crop, we do not

anticipate Arabica prices to revert to 2009levels in 2012, due to the risks of productionand low inventories. However, it is our viewthat the elevated prices from 2010/11 willhave resulted in increasing marginal gains inproduction and helping lift stock levels.Consequently, we expect the 2011/12season—a low season for the Brazilian crop,but the largest off-season crop ever—to be anadir in the medium term for the stocks-to-use ratio. While increases in planted area willonly yield output growth in three to fouryears’ time, the better prices have alsoencouraged better husbandry as well asincreased use of inputs, both of which are supportive for increasing output in the short term.

Brazilian production has increased notably inthe past as a result of higher prices, and we

COFFEE


271

Q3’11

257

Q4’11f

230

Q1’12f

220

Q2’12f

200

Q3’12f

180

Q4’12f

170

ICE

USc/lb

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201220112010

USc

/lb


Low caseBetter-than-expected2011/12 Colombiancrop and increased2012/13 productionbuild Arabica supply

Recession weakensconsumption growthin emerging markets;demand weakens,production increases

Recession fearsprompt a speculatorsell-off, resulting infutures liquidation

Base caseA large 2012 Braziliancrop shifts the globeback to surplus andalleviates tight supply

Demand growthcontinues at 2.5%,supporting values

Last year’s elevatedprices supportincreased marginalproduction growth in the medium term

High caseWeather conditionsaffect the Braziliancrop, exacerbatingtight supply situation

Low stock levelsaggravate anyproduction disruption,encouragingspeculative buying

The Vietnamesegovernment enacts abuying programme tosupport Robusta prices


Figure 3.19: Global coffee ending stock and stocks-to-use, 2000/01-2011/12f


mill

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bag

s

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t

Stocks-to-use (RHS)Ending stocks

Note: 1 bag=60 kilogrammes

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Source: Bloomberg, Rabobank, 2011

Figure 3.20: Coffee inventories and NY futures price, Jul 1995-Jul 2011

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/lb

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ICE Coffee stocks

Note: 1 bag=60 kilogrammes

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Section 3 Agri Commodity Outlooks: Coffee | 39

anticipate the country will respond to currentinternational values with a jump in output.The Brazilian crop has increased 80% since1981 while area has actually decreased 12.5%.However, it has not been a uniform fall ashigher coffee prices have led to increasedarea harvested. The coffee rally of 1986resulted in a harvest area increase of 17%three seasons later, while four years after the1997 rally, harvest area in the country hadgrown 14%.

Arabica production has been increasingslower than coffee demand growth. Globalproduction for the variety has increased only11% from 2001/02 to 2011/12, while totalcoffee demand has increased 29% in thesame period. The difference has been madeup by increased Robusta production andstock drawdown. Reduced production fromColombia in the past three seasons hasexacerbated the low Arabica stocks situationand has been a catalyst for the 2010/11 pricerally. In 2012, Arabica supply will be moreabundant because of the larger forecastBrazilian crop, but as this supply will not comeon-line until the start of May, volatility and riskremains elevated. Our early projection for the2012 Brazilian crop is 59 million 60kg bags, 46 million bags of which is expected to beArabica, and 7 million bags washed. Thecoming Brazilian crop is bearish given its size,but the previous record harvest in 2010occurred as prices were rallying to recordhighs. In our view, the difference is that higherprices of the past season will result in largerincreases in production in other producercountries in 2012.

Our base case of slowing economic growth in the US and the EU is not expected to have a measurable impact on coffee demand; we

also anticipate consumption growth in origincountries to remain robust. Global coffeedemand is forecast to increase 2.4% in2011/12, up from 2.1% the previous seasonand flat with the 10-year average of 2.5%. Inour view, coffee demand will be supported by lower prices in 2012 and increases inconsumption at origin, especially in Brazil.Coffee consumption in Brazil has beengrowing at a 3.9% annual average in the past 10 seasons, and we foresee useexpanding by 4.1% in 2012. Based on ourmodels, Brazil will replace the US as thelargest consumer of coffee in five years.

While coffee is not an essential component of the human diet (though this is subject todebate), the income elasticity of demand forthe product is low; during the financial crisisof 2007-2009 the demand for coffeecontinued to grow, albeit at a slightly slowerpace. Coffee imports and purchases wereskewed during the crisis as companies drewdown stocks and consumers altered buyinghabits, but the amount of coffee consumedincreased 2.2% and 1.1% in 2007/08 and2008/09, respectively. However, this growth is down from the previous five-year averageof 3.2%. The resilience of coffee demand wasillustrated during the severe recession of2007-2009, and we assume this robustdemand will remain even in the face ofweaker and uncertain economic conditions in 2012. Given the resilience of consumption,we expect prices in 2012 to be determined much more by supply-side dynamics.

Arabica prices are influenced by themovements in the US dollar and the Brazilianreal and our expectations of a weaker USdollar in 2012 are mildly friendly for coffeeprices. A falling US dollar is supportive for


Figure 3.21: Coffee currencies and NY futures price, Apr 2010-Oct 2011

BRL/USD COP/USD

0.048

0.049

0.050

0.051

0.052

0.053

0.054

0.055

0.056

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0.058

BRL/USD COP/USD

.50

.52

.54

.56

.58

.60

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.70

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NY front month coffee (USc/lb)

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coffee futures prices in NY as it means lowercosts for international buyers, promotingsales, and a falling dollar generallyencourages fund-buying in the commoditymarkets. Speculators use the agri complex as both a hedge against the falling UScurrency and a supporting factor.

The Brazilian real is expected to appreciate in2012, and this generally supports the Arabicamarket. As Brazil accounts for approximately40% of total global Arabica output and half of total Arabica exports, moves in the Braziliancurrency are an important factor in coffeeprices, on both the ICE and BMF Arabicafuture exchanges. A stronger Brazilian real is supportive for Arabica prices as growers in Brazil receive less value for the commodityand are not inclined to sell. The relationshipbetween the currency and prices on theterminal market breaks down when strongfundamental indicators move the market. Weanticipate currency moves to be supportivefor the coffee markets in 2012, but currencymarkets will likely be overshadowed byfundamental factors as supply is very tightand production risks are high.

Section 3 Agri Commodity Outlooks: Cocoa | 41

Abundant supply of cocoa beans and betterexpectations for the 2011/12 crops areexpected to lead prices lower in 2012. Thisdownside, as prices pass two-year lows,follows concerns about West African output dwindling.

The cocoa bean market is vulnerable to economic contraction as chocolateconfectionery is subject to demanddestruction when incomes are underpressure. Given the expectations of weakeconomic growth in the EU and the US, weforesee consumer chocolate demand in theseregions to be flat in 2012. However, the cocoabean market is somewhat insulated fromweakness in chocolate consumption due tothe increasing demand for cocoa powder,which is found in a variety of products, fromchocolate drinks and ice cream to health

supplements. The growth in demand forcocoa powder products is expected to comefrom emerging markets.

There is no consistent pattern for cocoa beanterminal markets in a recession since supplydynamics are generally more important forprices. During the 2007-2009 recession, cocoaprices on the ICE exchange in the US endedhigher. However, during this period cocoagrindings fell as many chocolate makersdecreased the size of consumer products orused substitutes for cocoa. Some of thedecrease in grindings can also be attributedto manufacturers drawing down stocks.Looking to 2012, we anticipate EU and USgrindings falling from 2011 levels, but totalglobal grindings to increase 3.7% in 2011/12,driven mostly by the powder market.

COCOA


3,042

Q3’11

2,969

Q4’11f

2,400

Q1’12f

2,350

Q2’12f

2,450

Q3’12f

2,350

Q4’12f

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ICE

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Low caseLarger-than-expectedcrops from West Africaadd to high bufferstocks, pushing priceslower

Economic contractionresults in lowerchocolate and cocoa-based production,crimping demand

Better supplyexpectations liquidatelarge commercial longposition in terminalmarkets

Base caseRecord carry-over from2010/11 season; largeproduct stockspressure terminalmarkets

Emerging-marketdemand for powderproducts underpinsthe entire complex

US/EU chocolateconsumption remainsstagnant withlacklustre performancein cocoa butter market

High caseNew governmentbuyer established in Ivory Coast,compromising supplycertainty

Increased chocolateand cocoa-basedproduct consumptionexceeds forecasts,causing inventorydrawdown

West African shortcrops diminished bydetrimental weather,pushing market intolarge deficit


Source: Rabobank, IMF, NCA, ECA, 2011

Figure 3.22: Cocoa grindings and YOY GDP change in mature markets, Jun 2000-Sep 2011

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The cocoa bean market could be impacted in 2012 by policy moves in Ivory Coast as the new government may play a larger role in the procurement and trade of cocoa. Thegovernment announced in early November2011 that farmers will receive a guaranteedcocoa bean price of between 50% and 60% of the international terminal price. This is not expected to have a significant impact asgrower prices are already at or above theselevels. The Ivory Coast government has statedthat the export tax is capped at 22%, downfrom a 25.3% average in 2008/09, and thelower tax will allow growers to realise greaterreturns. The new government has outlined a plan in which exporters must pre-purchasebeans before the harvest begins as a way to have funds to guarantee the farmer price. The uncertainty about the government’splans is impacting the market, and since the country accounts for one-third of globaloutput, unpredictable governmentinterventions will inject volatility into the international terminal markets.

Due to a large carry-over of cocoa beans from2010/11 and sizeable crops expected for the2011/12 main harvest, the supply of cocoabeans looks bearish in the short term. Withflat chocolate consumption, we anticipate the butter ratio, which in the EU fell to below1.0 in November, to continue to remain underpressure in 2012. Powder ratios are expectedto continue to drive the markets. This dynamichas been the focal point of the cocoa marketin the past year and we expect this tocontinue in early 2012.

In our view, the price of cocoa beans rose to anew norm in the past four years, as the marketbecame concerned that underinvestment in

capacity by the major producing regions wasleading to a global deficit. The average front-month price in NY between 2004 and 2007was USD 1,591/tonne while between 2008and 2011 it was USD 2,826/tonne, 78% higher.Concerns that farmers in West Africa wouldabandon plantations or switch production torubber supported terminal markets. It seemsthe high prices have worked; helped bysupportive weather, Ivory Coast productionreached a record in 2010/11, and governmentofficials say a large crop is also expected for2011/12. Even with the positive impacts of La Niña, production would not reach suchlevels if plantations had been abandoned or switched to rubber. Price signals haveincreased output, and alongside supportiveweather, this is a bearish outcome in a worldeating only marginally more chocolate.

Figure 3.24: NY Cocoa commercial long position and price, 1995-2011

Source: Rabobank, CFTC, 2011

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NY front month cocoa price (RHS)Commercial long position

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Figure 3.23: NY Cocoa prices, Nov 2000-Nov 2011

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Section 3 Agri Commodity Outlooks: Cotton | 43

In 2012, we expect the global cotton industryto be under pressure and prices to fall due tothe largest global crop ever and stagnantdemand. In our view, downside pricemovements in 2012 will be tempered in Q1 by the battle for acres in the NorthernHemisphere growing regions and concernsabout the impact of dryness on US plantings.

As a consumer good and not a food product,cotton is more susceptible to economicdownturns than the rest of the agri complex,and this was evident in price movementsduring the past recessions. In our view, cottondemand will be squeezed on both sides in2012, as high prices for the fibre in the pastseason resulted in higher priced yarn andtextiles; high unemployment and concernsabout household incomes have also resultedin increasingly cost-conscious consumers.Garments made from higher priced cottonare reaching retail outlets as the growth in theUS and EU economies remains anaemic andconsumer confidence low. Prices of apparel in the US jumped, with year-on-year increasesthe highest in two decades. Given the stable prices in the months leading up to November 2011, higher priced textiles will remain the norm for much of the first half of 2012 and will continue to impededemand growth.

The increased use of synthetic fibres worsensthe cotton outlook further. In the 2010/11season, when cotton prices reached all-timehighs, many textile producers blended moresynthetic fibres, reducing the demand fornatural cotton. Synthetic fibre production inChina, the largest producer, is forecast to havereached a record high in 2011. In 2012,

synthetic fibre will come under the samepressure as cotton as the apparel industryfaces reduced demand growth.

We forecast global cotton consumption in2011/12 to increase 1.5% while production for the 2011/12 season is expected to be 6.6% higher than the previous season. Thelargest contributor to demand growth isexpected to be emerging markets, especiallyChina. Apparel demand in China has notslowed as it has in the US; while the Chineseeconomy cooled in 2011, buyers purchased a record amount of textiles. Growth is forecast to slow further in 2012 in China, but we anticipate the consumption of apparel will remain strong. Although globaldemand for cotton and textiles is beingincreasingly driven by China, the countrycannot absorb all of the fibre. We expectprices will have to move lower in order tostimulate demand outside of China.

The US drought, which began in October 2010 and continues today, hasdevastated cotton production in Texas andmay have a lasting impact as spring plantingscould be threatened. The drought is likely to have reduced the US 2010/11 cottonproduction estimate by 2 million bales, or11%. The current La Niña pattern is forecast toremain in place for the second winter in a row.A La Niña pattern generally results in lowerprecipitation in the Texas/Oklahoma region.Together the two states accounted for 54% of total acreage planted in 2011. The NationalOceanic and Atmospheric Administration ofthe US projects the main cotton growingregion to remain dryer and warmer thanaverage. Time remains for the drought to

COTTON


168

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108

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Low caseDemand continues toweaken for cotton asgarment sales fall dueto economiccontraction

Higher USD reducesapparel imports into the US, cutting cottonconsumption rates

Further risk-off promptsmore investorliquidation in NY futures market; current33,157 longs = 13%open interest

Base caseBetter 2011 cropsincrease supply andweigh on prices

Lower internationalprices supportdemand growth

Planted area growthcontinues in 2012 withprices still high relativeto historic averages

High caseBetter-than-expectedeconomic growthspurs demand

Lower prices result inlower-than-expectedSouthern Hemisphereplanting, shrinkingsupply supportingprices after 2H 2012

Planting in the US isunable to reachestimates due tocontinued drought in Texas



break before plantings, but the weatherprojections for the 2012 US cotton crop are bullish.

Cotton will compete with the other row crops in 2012 for acres, and as prices in theagri complex are elevated, we do not expect a collapse of cotton values. US farmersincreased planted area 34% for the 2011/12season as prices reached new nominalrecords. A high abandonment rate of 33% in the season was the result of thedevastating drought. For 2012, our earlyprojections are for US farmers to decreaseplanting to 11 million acres. We assume that the weather conditions will improve in Texas, allowing for a more averageabandonment rate and yield. Given this, 2012 output is expected to exceed the 2011 harvest.

The cotton price on the NY market will have to strike a balance between promotingconsumption outside of China andencouraging enough US growers to plant in the spring of 2012. Given these dynamics,we expect Q1 2012 to be the most supportedperiod for cotton prices, but if benign weathersupports the US crop outlook, continueddownside is expected. Any correction in thecotton price could be amplified, dependingon the state of the global economy.

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Figure 3.26: Global and Chinese cotton consumption, 1971/72-2011/12f


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Figure 3.27: World cotton production and surplus/deficit, 1991/92-2011/12f


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Source: Bloomberg, Rabobank, MBER, 2011

Figure 3.25: Cotton and S&P GSCI Agriculture Index price performance in recessions, 1970-2009

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Section 3 Agri Commodity Outlooks: Livestock | 45

We expect US cattle prices to continue theirstrong performance in 2012 albeit with a brief plateau in Q1 as record feedlotinventories reach the market. However, tight feeder supply should bias price upwards from spring onward.

Lean hog prices are expected to flatten in 2012 as US and global supply increases but upside risks remain with strong Asiandemand and risk of disease in the Chinesedomestic herd. Strong demand fromemerging-market economies is expected to provide robust support for US livestockmarkets in 2012.

Live cattleUS live cattle prices are expected to fall in Q1 2012 from their November 2011 highs as record numbers of cattle on feed outstripdemand in the near term. A record drought in the southern US has left producers with asevere shortage of pasture and resulted inhigher placements of feeder cattle this year, at lighter weights than normal. TheSeptember placement of cattle under 600 pounds was 685,000 head, comparedwith 510,000 head in August 2010—a 34%increase—while in October 2011, the year-on-year spread narrowed to an 11% increase. We anticipate the lower weights and increasein placements will result in a large amount of live cattle being brought to market in theearly months of 2012 as cattle placed intofeedlots in July, August and September of2011 work their way through the system.

Tight supplies of feeder cattle mean that livecattle prices in Q2 2012 are expected to rise

in the US, further squeezing packer margins.Given the poor calving numbers in 2011, the shortage of feeder cattle is not expectedto be alleviated in 2012. Packers have incurrednegative margins on domestically sold beef in 2011 but have been able to at least partiallyrecoup losses on strong Asian exports atprofitable levels. US beef exports jumpedstrongly in 2011, up over 25% YOY and up9.12% on the five-year average. Our forecastof a weakening US dollar and relatively strong Australian and Brazilian currencies, two of the US’s major competitors in the beef export market, drive our forecast of improving US beef demand from foreignmarkets. However, this will also force USpackers to reduce imports of foreign beef.

With the anticipated relaxation of importrestrictions by Japan and the recentratification of the US–Korea Free TradeAgreement, we see both improved marketaccess and export demand providing strongsupport for US beef prices in 2012. However,this upside will be somewhat tempered ifeconomic conditions deteriorate muchfurther and emerging-market economygrowth slows.

These restrictions currently require US beefcattle to be 20 months of age or younger at the time of slaughter, but under newproposals, the maximum import age is likelyto be increased to 30 months. The catalyst forthe relaxation of restrictions has been thedecline in Japan’s domestic beef productionfollowing the tsunami in March 2011 andresulting radioactive contamination in the Japanese agri complex. With imports

LIVESTOCK

LIVE CATTLE LEAN HOGS12-month outlook from spot

Low caseChinesesubstantially reduceimports on the backof strong domesticproduction and astronger USD

Bank of Japanintervenes toweaken the yen

Large fall in the cornprice sees producersincrease farrowingsand raise herdinventories

Base caseChinese reducedemand due todisease recovery andhigher domesticproduction

Continuing economicuncertainty results in USD weakness;exports remain at1.68 million tonnes

Corn prices remainunder USD 6.50/lband above USD 6/lb

High caseFurther diseaseoutbreaks in Chinaresult in significantdomestic herdliquidations

Major importers’currenciesappreciate againstthe USD

Corn strengthens,resulting inproducers scalingback production


Low caseUSD strengthensand US exportdemand falters

Packer export profitsfall and withnegative marginsthey reducepurchases

Brazilian andAustralian currenciesweaken against theUSD and major beefimporting currencies

Base caseFeedlot inventoriesfall on tight feedersupply

Packers continue tomake positive profitsdriven by strongexport demand

USD remains weakagainst the majorimporters

High caseLa Niña persists past the expectedJune end

USD weakensfurther, resulting in stronger-than-expected exportgrowth formemerging markets

Feeder cattle priceskyrockets onpersistent droughtconditions


of 351 million pounds, Japan was the third-largest export market for US beef in 2010.However, their imports in 2010 were 61.7%below where they were in 2003 at 918 millionpounds, before restrictions were imposed.Japan’s relaxation of the age restriction on US beef opens the market to heavier carcassweights. If the yen continues its strongperformance against the US dollar, we expectthere to be strong upside potential for USbeef exports into Japan in 2012.

We expect to see the beef cut marketcontinue to exhibit a large spread betweenChoice and Select cuts in 2012 as seen in thelatter half of 2011. The catalyst for this spreadmovement has been the entry of Walmartinto the Choice beef market. Walmart haslong been a retailer of Select cuts, the lowestof three USDA grades of beef at the retail levelin the US. However, in an effort to increasesales and attract a higher value customer, theworld’s largest retailer has added Choice cuts,the midlevel retail cut, to their meat aisle. This move has increased the spread betweenChoice and Select cuts to a full USD 19/cwtfrom a pre-Walmart entry spread of a mere USD 3/cwt. Over 50% of Walmart’s 260 billion dollar income came from grocerysales in 2010. Given Walmart’s market share,packers have been bidding up the price of live cattle, despite negative domestic margins,in an effort to capture long-term businessfrom the new player in the Choice cut space.We see the entry of such a retailer into theChoice cut market as being supportive ofprices for 2012 and expect the spreadbetween wholesale boxed Choice cuts and wholesale boxed Select cuts to remainstable at current levels.

Lean hogsMomentum in the US lean hog market isexpected to wane in 2012 as producersincrease farrowing to meet demand andChinese import growth slows. This is comingoff the back of strong bullish momentum inthe US lean hog market in 2011. US herdinventories in 2011 rose by 2.5% in Q3 fromthe traditional seasonal low at the end of Q1;this is compared with the Q3 2010 rise of1.6%. Just as the cattle market benefited froma low US dollar and high export demand, sotoo has the pork industry. Strong exportdemand in 2011 has helped maintain higherdomestic prices, a situation that will likelycontinue with a weak US dollar in 2012.

Pork producers and processors have beenchallenged with slowing margin growth dueto the upward shift in corn prices. CBOT cornprices averaged 61% higher in 2011 than in2010. As a percentage of total feed cost in theraising of US lean hogs, corn has risen from49.6% to 54.6% due to both the higher corncost and the 11.8% fall in the price of soymeal.Using a 3:1 feed conversion ratio andassuming a 75% corn feed mix, the cost ofadding one pound to a hog under the currentApril 2012 live hog crush is USD 0.42/pound.

While US breeding stocks increased 1.3% inNovember, eventual year-on-year expansion is uncertain due to the relatively high price of corn. Current lean hog packer margins forDecember 2011-April 2012 indicate a profit of USD 8.58/cwt, a USD 10.27/cwt turnaroundfrom the same crush last year. In theDecember-April crush, corn accounts for 55% of total feed cost, a rise of 5% from thesame crush 12 months ago. November 2010saw producers working with a corn cost of USD 60.01/head, which rose to


US CPI (RHS)Boxed beef Choice cut

Figure 3.28: US beef prices and inflation, Jan 2004-Jul 2011

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Figure 3.29: US boxed beef cutout value 600 lbs-900 lbs spread, Nov 2009-Nov 2011

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Section 3 Agri Commodity Outlooks: Livestock | 47

USD 67.14/head in November 2011, thoughthe increase in the price of lean hogs morethan offset this. This upward movement in thelean hog market has been driven, to a largeextent, by strong export demand. The Januaryto September export figures released by theUSDA report pork exports at 1.68 milliontonnes. This equals a 288 thousand tonneincrease year-on-year or a 20.6% increase in volume and a 40.5% increase in value.

There is a risk of weaker pork exports intoChina in 2012 as domestic producers recoverfrom disease outbreaks and scale upproduction. This increase in production hasalready been seen to a degree, as Chineseproducers reacted to a 139% price rise in the five months to July 2011. There waswidespread liquidation of the Chinesedomestic hog herd in 2011 due to diseaseand this resulted in a larger-than-expectedshortfall in domestic production. In the wakeof this shortage, imports of US pork in Chinarose 67.5% in the first three quarters of 2011,a figure that rises to 376% if Taiwan and HongKong numbers are excluded. Unsurprisingly,the sharp increase in prices has since resultedin increased herd-building and increases inanimals brought to market, resulting in a fallfrom the June high of CNY 19.8/pound. Withpork considered to be of national strategicimportance to China, the government hasinitiated large campaigns to reduce theoutbreaks of foot-and-mouth disease and issimultaneously seeking to modernise theproduction chain, with the ultimate goal ofreaching self-sufficiency.

Japan, the largest export market for US pork,increased demand by 14% for the period ofJanuary to October compared to the sameperiod in 2010. The increase in demand wasdriven by the appreciation of the yen againstthe US dollar. Pork export demand isincreasingly exposed to currency fluctuationsas the Bank of Japan continues to intervene inthe foreign exchange market and states thatit will continue to do so in order to supportdomestic exports on a lower yen.


Note: Spot price is as reported on the Jilin Market

Figure 3.30: Chinese pork spot prices, Jan 2009-Nov 2011

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Figure 3.31: China’s pork imports volume, Jan 2010-Oct 2011

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Appendix | 49

Appendix

Global agri commodity balance sheets

Global corn supply & demand Rabobank USDA

(1,000 Ha/1,000 Mt) 07/08 08/09 09/10 10/11f 11/12f 12/13f 10/11f 11/12f

Beginning stocks 110,069 132,272 147,197 144,047 129,869 120,112 144,047 129,038

Area harvested 160,534 158,417 157,763 163,221 168,240 168,830 163,221 168,036

Yield 4.9 5.0 5.2 5.1 5.1 5.2 5.1 5.1

Production 793,615 798,824 819,607 827,393 855,781 884,505 828,687 858,989

Imports 98,489 82,587 89,756 91,302 93,311 99,739 90,088 92,111

Total supply 1,002,173 1,013,683 1,056,560 1,062,742 1,078,962 1,104,357 1,062,822 1,080,138

Exports 98,614 84,467 96,810 90,140 96,777 99,407 90,451 95,142

Feed consumption 496,838 479,294 488,656 493,740 507,266 514,935 494,040 508,525

FSI consumption 275,404 300,851 327,047 348,993 354,806 366,255 349,293 354,901

Total consumption 772,242 780,145 815,703 842,733 862,072 881,190 843,333 863,426

Total use 870,856 864,612 912,513 932,873 958,850 980,597 933,784 958,568

Surplus deficit 21,373 18,679 3,904 -15,340 -6,291 3,647 -14,646 -4,437

Ending stocks 131,317 149,071 144,047 129,869 120,112 123,759 124,300 121,570

Stocks/use 17.0% 19.1% 17.7% 15.4% 13.9% 12.6% 14.7% 14.1%

Global wheat supply & demand Rabobank USDA

(1,000 Ha/1,000 Mt) 07/08 08/09 09/10 10/11f 11/12f 12/13f 10/11f 11/12f


Area harvested 217,908 224,721 227,166 222,627 222,309 221,500 222,627 222,309

Yield 2.8 3.0 3.0 2.9 3.1 3.0 2.9 3.1

Production 611,231 682,190 684,306 648,698 684,049 662,159 648,698 683,299

Imports 113,666 136,933 133,576 129,847 137,595 137,333 129,847 133,786

Total supply 855,543 945,072 984,980 979,450 1,021,137 1,004,148 979,450 1,013,211

Exports 117,416 143,660 135,799 129,188 140,799 139,491 131,373 137,299

Feed consumption 98,117 117,885 115,662 117,047 128,200 119,556 112,485 126,424

FSI consumption 515,593 516,870 532,614 534,651 547,482 542,679 539,466 546,888


Total use 731,126 778,415 784,075 780,886 816,481 801,726 783,324 810,611

Surplus deficit -2,479 47,435 36,030 -3,430 8,367 -75 -3,253 9,987

Ending stocks 124,417 166,657 200,905 199,493 204,656 202,422 196,126 202,600

Stocks/use 20.3% 26.3% 31.0% 30.6% 30.3% 30.6% 30.1% 30.1%




Global soybean supply & demand Rabobank USDA

(1,000 Ha/1,000 Mt) 07/08 08/09 09/10 10/11f 11/12f 12/13f 10/11f 11/12f


Area harvested 90,674 96,367 102,170 102,757 103,965 105,365 102,757 104,363

Yield 2.4 2.2 2.6 2.6 2.5 2.5 2.6 2.5

Production 221,006 211,952 260,854 263,106 257,960 263,997 264,180 258,905

Imports 78,118 77,376 86,798 88,659 96,206 100,970 88,678 94,206

Total supply 362,114 340,751 390,222 411,170 419,846 423,245 412,263 421,479

Exports 79,589 76,842 92,596 92,528 98,017 100,467 92,413 96,898

Crush 201,819 193,222 209,503 222,369 232,725 234,962 221,109 230,672

Seed/feed/residual 27,800 28,115 28,718 30,593 30,826 31,126 30,373 30,354


Total use 309,208 298,179 330,817 345,490 361,568 366,555 343,895 357,924

Surplus/deficit -10,084 -8,851 16,835 6,275 -7,402 -1,588 8,963 -4,813

Ending stocks 52,906 42,572 59,405 65,680 58,278 56,690 68,368 63,555

Stocks/use 23.0% 19.2% 24.9% 26.0% 22.1% 21.3% 27.2% 24.3%

Global palm oil supply & demand Rabobank USDA

(1,000 Mt) 07/08 08/09 09/10 10/11f 11/12f 12/13f 10/11f 11/12f


Production 41,084 43,992 45,862 47,925 50,466 52,000 47,930 50,566

Imports 30,733 34,151 34,764 34,989 37,834 41,000 35,349 37,834

Total supply 76,064 82,224 85,517 88,297 93,127 98,426 88,662 93,722

Exports 32,226 34,686 35,641 38,397 39,995 40,950 36,270 38,865

Food consumption 29,616 31,293 32,583 33,786 35,932 38,088 34,361 35,932

Industrial/feed 10,264 11,160 11,910 11,287 11,774 12,400 12,709 13,539


Total use 72,106 77,139 80,134 83,470 87,701 91,438 83,340 88,336

Surplus deficit -289 1,004 492 -556 599 1,562 -61 64

Ending stocks 3,958 5,085 5,383 4,827 5,426 6,988 5,322 5,386

Stocks/use 9.9% 12.0% 12.1% 10.7% 11.4% 13.8% 11.3% 10.9%


Appendix | 51


Global cotton supply & demand Rabobank USDA

(1,000 Ha/1,000480lb bales) 07/08 08/09 09/10 10/11f 11/12f 12/13f 10/11f 11/12f


Area harvested 32,917 30,591 30,134 33,507 35,443 35,873 33,507 36,048

Yield 3.6 3.5 3.4 3.4 3.5 3.5 3.4 3.4

Production 119,683 107,081 101,629 115,095 123,070 125,690 115,277 123,888

Imports 38,959 30,476 36,349 37,000 36,000 35,000 35,654 36,305

Total supply 220,908 198,425 198,781 196,333 205,367 215,340 195,169 205,412

Exports 39,005 30,065 35,595 37,000 36,000 35,000 35,572 36,325

Loss -2,154 -2,633 -162 31 -100 -150 31 -143

Use 123,329 110,315 119,110 113,005 114,817 119,317 114,347 114,274

Total domestic use 121,175 107,682 118,948 113,036 114,717 119,167 114,378 114,131

Total use 160,180 137,747 154,543 150,036 150,717 154,167 149,950 150,456

Surplus/deficit -3,646 -3,234 -17,481 2,090 8,253 6,373 930 9,614

Ending stocks 60,728 60,678 44,238 46,297 54,650 61,173 45,219 54,956

Stocks/use 49% 55% 37% 41% 48% 51% 40% 48%

Global coffee supply & demand Rabobank USDA

(1,000 60 kg bags) 06/07 07/08 08/09 09/10 10/11f 11/12f 10/11f 11/12f


Arabica production 81,717 72,734 82,390 73,854 85,450 75,000 85,787 80,125

Robusta production 48,867 46,633 51,842 52,027 54,696 55,981 52,096 54,896

Total output 130,584 119,367 134,232 125,881 140,146 130,981 137,908 135,046

Imports 97,470 96,809 96,831 93,800 104,000 105,000 104,473 100,574

Total supply 259,954 252,361 258,354 250,752 269,624 267,085 266,799 262,467

Exports 98,000 96,479 97,303 93,000 103,500 105,000 107,455 102,123

Soluble use 12,857 13,584 12,376 13,144 13,400 13,900 14,694 14,595

Use 112,912 115,007 117,604 119,130 121,620 124,400 117,803 119,362


Total use 223,769 225,070 227,283 225,274 238,520 243,300 239,952 236,080

Surplus/deficit 4,815 -9,224 4,252 -6,393 5,126 -7,319 5,411 1,089

Ending stocks 36,185 27,291 31,071 25,478 31,104 23,785 26,847 26,387

Stocks/use 29% 21% 24% 19% 23% 17% 23% 22%

Global sugar supply & demand Rabobank

(1,000 Mt) 04/05 05/06 06/07 07/08 08/09 09/10 10/11f 11/12f


Production 141,013 151,079 166,405 166,610 151,779 156,862 165,385 174,017

Imports 47,056 48,590 46,572 45,318 46,863 53,084 51,183 50,118

Total supply 208,567 212,303 230,367 239,308 226,075 219,443 223,274 231,024

Exports 49,993 50,414 51,721 51,255 50,993 57,207 56,053 54,138

Consumption 145,169 147,274 153,341 159,947 160,258 160,150 161,397 163,942

Total use 145,169 147,274 153,341 159,947 160,258 160,150 161,397 163,942

Surplus/deficit -7,093 1,981 7,915 727 -12,610 -7,411 -882 6,054

Ending stocks 61,225 63,962 72,699 74,296 62,581 57,889 57,007 63,062

Stocks/use 42% 43% 47% 46% 39% 36% 35% 38%

Global cocoa supply & demand Rabobank

(1,000 tonnes) 04/05 05/06 06/07 07/08 08/09 09/10 10/11f 11/12f

Gross production 3,381 3,786 3,434 3,740 3,596 3,602 4,302 4,037

Ivory Coast 1,286 1,408 1,229 1,382 1,222 1,245 1,500 1,290

Ghana 599 740 614 729 662 620 1,025 940

Net production 3,256 3,748 3,400 3,694 3,542 3,566 4,259 3,997

Grindings 3,363 3,527 3,690 3,755 3,508 3,700 3,882 4,025

Surplus/deficit -107 221 -290 -61 34 -134 378 -28

Ending stocks 1,666 1,906 1,645 1,584 1,618 1,484 1,861 1,833

Stocks/use 50% 54% 45% 42% 46% 40% 48% 46%


US agri commodity balance sheets

US corn supply & demand Rabobank USDA

(Mln acres/Mln bu.) 06/07 07/08 08/09 09/10 10/11f 11/12f 12/13f 10/11f 11/12f

Beginning stocks 1,967 1,304 1,624 1,673 1,708 1,128 608 1,708 1,128

Area harvested 70.6 86.5 78.6 79.5 81.4 83.9 86.0 81.4 83.9

Yield 149.1 150.7 153.9 164.7 152.8 146.3 154.0 152.8 146.7

Production 10,531 13,038 12,092 13,092 12,447 12,275 13,247 12,447 12,310

Imports 12 20 14 8 28 15 15 28 15

Total supply 12,510 14,361 13,729 14,773 14,182 13,418 13,870 14,182 13,453

Exports 2,125 2,437 1,849 1,980 1,835 1,625 1,800 1,835 1,600

Feed consumption 5,540 5,858 5,182 5,125 4,792 4,700 4,550 4,792 4,600

FSI consumption 3,541 4,442 5,025 5,961 6,428 6,485 6,596 6,428 6,410

Ethanol use 2,119 3,049 3,709 4,568 5,020 5,075 5,175 5,020 5,000

Total consumption 9,081 10,300 10,207 11,086 11,219 11,185 11,146 11,219 11,010

Total use 11,207 12,737 12,056 13,066 13,054 12,810 12,946 13,054 12,610

Ending stocks 1,304 1,624 1,673 1,708 1,128 608 924 1,128 843

Stocks/use 11.6% 12.8% 13.9% 13.1% 8.6% 4.7% 7.1% 8.6% 6.7%

US soybean supply & demand Rabobank USDA


Beginning stocks 449 574 205 138 151 215 235 151 215

Area harvested 74.6 64.1 74.7 76.4 76.6 73.7 72.9 76.6 73.7

Yield 42.85 41.73 39.73 43.98 43.46 41.40 44.00 43.46 41.34

Production 3,197 2,677 2,967 3,359 3,329 3,050 3,207 3,329 3,046

Imports 9 10 13 15 14 15 15 14 15

Total supply 3,655 3,261 3,185 3,512 3,494 3,280 3,457 3,495 3,275

Exports 1,117 1,159 1,279 1,499 1,500 1,300 1,450 1,501 1,325

Crush 1,808 1,803 1,662 1,752 1,648 1,625 1,675 1,648 1,635

Seed/feed/residual 157 94 106 110 131 120 110 131 120

Domestic consumption 1,965 1,897 1,768 1,862 1,779 1,745 1,785 1,779 1,755

Total use 3,081 3,056 3,047 3,361 3,279 3,045 3,235 3,280 3,080

Surplus/deficit 124 -369 -67 13 64 20 -13 64 -19

Ending stocks 574 205 138 151 215 235 222 215 195

Stocks/use 18.6% 6.7% 4.5% 4.5% 6.6% 7.7% 6.9% 6.5% 6.3%

US wheat supply & demand Rabobank USDA


Beginning stocks 571 456 306 656 976 863 824 976 863Area harvested 46.8 51.0 55.7 49.9 47.6 45.7 46.9 47.6 45.7Yield 38.7 40.2 44.9 44.5 46.3 43.8 44.2 46.3 43.8Production 1,808 2,051 2,499 2,218 2,207 1,999 2,073 2,207 1,999Imports 122 113 127 119 97 120 110 97 120Total supply 1,930 2,163 2,626 2,336 2,304 2,119 2,183 2,304 2,119

Exports 2,501 2,620 2,932 2,993 3,280 2,982 3,007 3,280 2,982Feed consumption 117 16 255 150 132 165 145 132 160FSI consumption 1,020 1,035 1,005 988 996 1,018 1,009 996 1,018Total consumption 1,137 1,051 1,260 1,138 1,128 1,183 1,154 1,128 1,178Total use 2,045 2,314 2,275 2,017 2,417 2,158 2,169 2,417 2,153

Surplus deficit -115 -150 351 318 -113 -39 14 -113 -34Ending stocks 456 306 656 976 863 824 838 863 829Stocks/use 22.3% 13.2% 28.9% 48.4% 35.7% 38.2% 38.6% 35.7% 38.5%

US cotton supply & demand Rabobank USDA

(Mln acres/1,000 bales) 06/07 07/08 08/09 09/10 10/11f 11/12f 12/13f 10/11f 11/12f

Beginning stocks 6,069 9,479 10,051 6,337 2,947 3,257 3,567 2,947 2,600Area harvested 5,152 4,245 3,063 3,047 4,360 3,900 3,900 4,330 3,986Yield 4.2 4.5 4.2 4.0 4.1 4.1 4.6 4.2 4.1Production 21,588 19,207 12,815 12,188 17,850 16,100 17,900 18,104 16,300Imports 19 12 0 0 10 10 10 9 10Total supply 27,676 28,698 22,866 18,525 20,807 19,367 21,477 21,060 18,910

Exports 12,959 13,634 13,261 12,037 14,000 12,000 13,500 14,376 11,300Loss 303 429 -273 -9 0 0 0 184 10Use 4,935 4,584 3,541 3,550 3,550 3,800 3,400 3,900 3,800Total use 18,197 18,647 16,529 15,578 17,550 15,800 16,900 18,460 15,110

Net trade 12,940 13,622 13,261 12,037 13,990 11,990 13,490 14,367 11,290Surplus/deficit 3,410 572 -3,714 -3,390 310 310 1,010 -347 1,200Ending stocks 9,479 10,051 6,337 2,947 3,257 3,567 4,577 2,600 3,800Stocks/use 52.1% 53.9% 38.3% 18.9% 18.6% 22.6% 27.1% 14.1% 25.1%


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Agri Commodity Markets Research (ACMR)

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