Agricultural Forecasts: Key highlights from Macquarie latest agri-commodity price forecasts – “We believe 2011 will be a year of high prices in the agricultural and food sector.”

“Since the last update in October 2010 (Agricultural Forecasts: Weather anomalies slashing the supply buffer), we have further upgraded our price forecasts. Prices have moved sharply higher in the last three months, as continued adverse weather events owing to a strong La Niña have hampered crop prospects. In the face of stubbornly resilient demand growth, this has led to a tightening of inventories. With new supplies from the northern hemisphere producers not due until the third quarter of 2011, prices will have to rise further to ration demand in the interim period.”

• Corn and coffee are our top bullish calls. We have been very upbeat on corn over the last six months and continue to expect price increases as the market works to ration usage and draw more acreage into production. Coffee prices will surge higher as inelastic demand, coupled with Brazil’s “off-year” plunges the global coffee market further into deficit. We are also bullish soybeans as the US market risks drawing down to the tightest stocks/use ratio level seen since the 1970s. Cotton and wheat prices should remain elevated for the bulk of the year, as the need to ration demand, coupled with risks over the 2011 growing season will keep markets tight at least until the northern hemisphere harvest is completed by Q3 2011. Low stocks, and strong import demand will keep sugar in deficit in early 2011, supporting prices higher. But new Brazil supplies from May onwards should provide relief. Finally, we remain neutral for cocoa due to a slight surplus, despite political unrest in the Ivory Coast.
  

  
  

• All of these commodities, in some form or the other, form the basis for staple foods around the world. The multiplier effects of rising prices in these commodities are widespread; they feed into the livestock sector, risking pushing prices higher for meat or dairy. They also make substitute commodities such as rice, competing crops or other oilseeds more bullish – both on the supply side, as they battle for acreage to expand production – and on the demand side, by switching to alternative food/feed options.
  

  
  

• The high price scenario is reminiscent of 2007/08, the last time the world experienced “agflation”. The fear of food price inflation risks triggering reactions from governments that echo events of three years ago, such as importing more than necessary in order to build domestic stockpiles, imposing export restrictions to secure more supplies internally, and subsidising foodstuffs for the people. The immediate consequence of these intervention measures is typically to tighten world supplies even further, thus triggering further price increases. This is an upside risk that could push prices even higher than what we currently forecast.
  

  
  

• With the agri-commodities’ stock buffer much leaner than it was a year ago, there is little room for error, and a continuation of adverse weather hampering any production recovery would cause prices to surge further to the upside. Finally, greater “risk-on” inflows of investor money – be it due to a weaker US dollar or inflationary expectations – would also see agri prices become more inflated than currently stated in our base case.