Investment Research General Market Conditions 20 May 2015 Research Commodities El Niño returns grains and soft commodities at risk Meteorologists now agree that El Niño has arrived and project that it will last throughout the year and be of similar strength to the El Niño of 2009-10. This will create abnormal weather conditions, which may affect production of a wide range of grains and soft commodities, including in particular corn, wheat, cocoa, coffee, palm oil and sugar, and to a lesser extent rapeseed and soybean. Current high stock levels, which cover around 20-30% of annual consumption of corn, wheat, soybean, sugar and coffee, may soften the impact of El Niño. We expect grain prices to edge higher in the coming years with cost inflation and have further revised up our forecasts for corn and wheat prices, reflecting the firmer outlook for El Niño weather. In our view, prices in the forward market do not reflect the upside risk from El Niño, and we therefore recommend that clients on the consumer side hedge H2 2015 and 2016 exposure at current levels. El Niño weather has arrived Meteorologists have called for El Niño weather to arrive for over a year, but now they agree that the weather phenomenon has returned. In recent released reports, the Australian Bureau of Meteorology and the US National Oceanic and Atmospheric Administration are operating with base scenarios under which El Niño weather will be present throughout 2015 and they further put a high probability that it will persist during the Northern Hemisphere summer this year, see here and here. It has been five years since the last period of El Niño weather. Although there is high uncertainty over how strong the weather phenomenon will be, current forecasts suggest it could develop into similar strength as the El Niño of 2009-10, i.e. the world could be headed for a period of significant abnormal weather patterns. Forecasters agree on El Niño weather Source: Macrobond Financial, NOAA and Australian Bureau of Meteorology Effect of El Niño during Northern Hemisphere summer Source: NOAA Senior Analyst Jens Nærvig Pedersen +45 4512 8061 jenpe@danskebank.dk Important disclosures and certifications are contained from page 6 of this report. www.danskeresearch.com
During the Northern Hemisphere summer, El Niño weather normally results in weather which is dryer than normal for the season in Southeast Asia and Australia, warmer and dryer weather in South America and more rain in the western part of North America. Such adverse weather poses a risk to wheat, sugar, coffee and palm oil production in Southeast Asia and Australia, a risk to cocoa, coffee and sugar supplies from South America and to corn and wheat production taking place in the US. During the Northern Hemisphere winter, Central and East Asia tend to experience warmer and rainier weather, South Asia and Australia dryer weather, East Africa tends to get more rain and Southeast Africa dryer weather. The winter in North America tends to be warmer and include more rain, while weather in the Northern part of South America tends to be dryer than normal for the season, while in the Eastern part of South America it tends to be warmer and in the Southern and Western part more wet than normal for the season. The adverse weather puts production of most major soft commodities including corn, wheat, soy, rapeseed, cocoa, coffee, sugar and palm oil at risk. Effect of El Niño during Northern Hemisphere winter Source: NOAA High stocks may soften impact of El Niño One important factor, which may soften a hit to production of the various grains and soft commodities listed above, is the current relatively high stock levels. It means that a draw on inventories could replace production affected by adverse weather, which in the end may dampen the effect on prices. This is particularly the case for soybean, wheat, coffee and sugar, where current stocks can cover around 25-30% of annual consumption. Following a couple of years of surging production, corn stocks have reached the highest level in years and may cover around 20% of annual consumption at the present time. The rapeseed and palm oil markets are more tight with stocks only able to cover around 10-12% of annual consumption. Most rapeseed production takes place in Europe and Canada, two regions which are normally not affected directly by El Niño weather, which means that the rapeseed market is less at risk of being hit by disruptive El Niño weather. The palm oil market, on the other hand, will be more alert as production in Southeast Asia could be plagued by dry weather during the rest of the year. 2 20 May 2015 www.danskeresearch.com
Relatively high stocks of soft commodities Source: Macrobond Financial El Niño to push grain prices higher Overall, we still expect cost inflation to push prices on CBOT corn, CBOT soybean and CBOT wheat higher over the coming 18M. Following the new, firmer outlook for El Niño weather this year, we have further revised our price forecasts for CBOT wheat and CBOT corn higher from our recent forecast report see Research Commodities: Grain and oilseed prices to trend higher this year and next, 4 March 2015. This reflects our expectation that wheat and corn production is more at risk of being affected negatively by the projected adverse weather. This holds for milling wheat prices as well, however, we have revised our 2016 forecast slightly down reflecting our revised view on EUR/USD. We see less of an upside risk to CBOT soybean prices from El Niño weather. Furthermore, we expect the rapeseed price to rise short-term, as we forecast EUR/USD to drop back following the recent rebound higher, while European rapeseed and wheat production should be less affected by El Niño weather. We now forecast the price on CBOT wheat to average USD603/bu next year, revised up from USD578/bu, and the price on CBOT corn to average USD435/bu, revised up from USD428/bu, reflecting the new outlook for El Niño. We forecast CBOT soybean to average USD1,031/bu, revised down from USD1,115/bu the revision being mainly due to the decline in prices at the beginning of the year. Finally, we have kept our 2016 forecast for the price on milling wheat unchanged at EUR205/MT, while we have revised our price forecast on rapeseed down to EUR352/MT from EUR395/MT. Danske Bank s price grain price forecasts 2015 2016 AVERAGE 18/05/15 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 16Q4 2014 2015 2016 Agriculturals: front month Matif Mill Wheat ( /t) 177 190 190 209 208 208 206 204 202 187 199 205 Rapeseed ( /t) 355 360 360 381 361 360 356 352 340 354 366 352 CBOT Wheat (USd/bushel) 519 523 530 550 565 580 595 610 625 588 542 603 CBOT Corn (USd/bushel) 369 385 390 400 410 420 430 440 450 416 396 435 CBOT Soybeans (USd/bushel) 958 990 1,000 1,000 975 1,000 1,025 1,050 1,050 1,245 991 1031 Both the wheat price and the corn price currently trade at a premium in the forward market on one year this premium is currently around 10%. This premium has not changed significantly following the recent firmer outlook for El Niño weather and more or less reflects historic price volatility. Furthermore, prices in the forward market are 3 20 May 2015 www.danskeresearch.com
below our forecasts for corn, wheat, milling wheat and soybean. Hence, in our view, the current pricing in the forward market does not reflect the rising upside risk, and we therefore recommend clients on the consumer side to hedge exposure in H2 2015 and 2016 at present levels. Corn forecasts vs. forwards Soybean forecasts vs. forwards Rapeseed forecasts vs. forwards Wheat forecasts vs. forwards Milling wheat forecasts vs. forwards Wheat price forward premium Corn price forward premium 4 20 May 2015 www.danskeresearch.com
World crop calendar World crop calendar Grain Country % of world % of world production exports Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Corn Argentina 2.5 12.8 Harvesting Planting Brazil 7.6 18.2 China 23.0 0.0 Euro Zone 6.9 2.1 Ukraine 2.6 13.2 US 35.0 39.9 Rapeseed Canada 21.7 61.4 China 20.8 0.0 Euro Zone 31.7 2.3 Ukraine 2.9 12.7 Soybean Argentina 18.0 7.0 Brazil 30.6 40.8 Paraguay 2.8 3.8 Canada 2.0 3.1 China 3.6 0.2 US 33.0 39.6 Wheat Australia 3.6 11.8 Canada* 4.0 13.1 China 18.1 0.6 India 12.5 0.3 Euro Zone 20.9 20.7 Russia 7.4 12.7 Ukraine 3.1 6.7 US 7.9 16.0 Source: USDA, Danske Bank 5 20 May 2015 www.danskeresearch.com
Disclosure This research report has been prepared by Danske Bank, a division of Danske Bank A/S ( Danske Bank ). The author of this research report is Jens Nærvig Pedersen, Senior Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication. General disclaimer This research has been prepared by Danske Bank (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. 6 20 May 2015 www.danskeresearch.com
This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-6. Danske Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Inc. directly and should be aware that investing in non- U.S. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission. 7 20 May 2015 www.danskeresearch.com