Societe Generale hiked its forecasts for grain futures, warning that there may be more than weather behind weak increases in crop sowings, even as wheat prices fell to their lowest for six months.
Investors should go "underweight" in positions on base metals, the bank said, urging the sale of positions in natural gas too, thanks to concerns of a "bumpy landing" for the slowing Chinese economy.
"For the remainder of 2011, we doubt that investors will be willing to run large long positions in commodities with very high exposure to the Chinese economy," Societe Generale said in a report.
However, the briefing recommended purchasing Chicago corn futures, and hiked forecasts for all three major Chicago-traded crops in 2012 and 2013, with corn and wheat hopes lifted for 2014 too.
"The sub-group of commodities with the strongest fundamentals is grains - corn, soybean and wheat," the report said.
"We recommend using the recent correction lower in the corn price to go long the September 2011 Chicago future as the corn market remains extremely tight."
At the limit?
The recommendations reflected in part the increasing likelihood of downgraded harvests thanks to poor weather which has held up sowings and dented yield potential, with the production of the three crops set to fall 6m tonnes behind consumption in 2011-12.
| SocGen forecasts for Chicago corn prices, (change on last forecast) 2011: $7.61 a bushel, (+$1.40) 2012: $7.43 a bushel, (+$2.15) 2013: $5.60 a bushel, (+$1.10) 2014: $5.10 a bushel, (+
.40) 2015: $4.90 a bushel, (unchanged) 2016: $5.10 a bushel, (n/a) Prices represent year average |
But even with benign weather, the "subdued" pace of sowings increases, despite bumper prices, raised doubts over agriculture's ability to respond to increased demand.
But even with benign weather, the "subdued" pace of sowings increases, despite bumper prices, raised doubts over agriculture's ability to respond to increased demand. "Bad weather and floodings may have prevented some of the planned plantings, but this is only a partial explanation," Societe Generale analyst Emmanuel Jayet said.
"The main reason might be that the US and Europe are close to their limit in terms of cropped area."
Consultancy Strategie Grains last week lowered by 100,000 hectares to 56.8m hectares its estimate of grain sowings for this year's harvest, implying a rise of a modest 600,000 hectares year on year despite far higher prices this time.
Mr Jayet said that while there was potential for lifting crop yields,, and expanding agricultural area outside Europe and the US, "this will take time, and leads us to raise significantly our [futures price] forecasts for 2012 and 2013".