February 14, 2012

 

Societe Generale upbeat on corn, hog futures prices

 

 

After flagging an end of a nine-month exodus of funds from the agricultural industry, Societe Generale said it was "mildly bullish" on farm commodities futures, specifically corn and lean hogs.

 

Investments in agricultural-based exchange traded products (ETPs) stuck at US$5 billion in January, the first month without outflows since March last year, the bank said.

 

The withdrawals since April claimed nearly one-third of assets held in farm ETPs, the biggest decline in any of the commodity classes, by proportion.

 

Precious metals enjoyed net inflows of US$13.5 billion, or 9.3%, over the period,

 

And SocGen raised hopes for farm commodities to continue to be viewed with less distaste, recommending commodity investors take "overweight" stances in both the livestock and grains-oilseeds segments, if attributing soft commodities a neutral rating.

 

"We remain mildly bullish agriculture," SocGen analyst Jeremy Friesen said, flagging the sector's "demand resilient" charactersistics.

 

Corn had a particularly strong short-term outlook, Friesen said, warning that although the US ethanol market had weakened, setbacks from the disruptive La Nina weather pattern "are still being under-appreciated by the market".

 

Many brokers, including Goldman Sachs and Rabobank, have forecast that the downgrades by the USDA on Thursday (Feb 9), in its much-watched Wasde report, to estimates for drought damage to South America crops will not be the last.

 

Lean hogs too were placed as an overweight call among commodities, after data earlier this week showed Chinese food prices in January 10.5% higher than a year before, compared with a year on year rise of 9.1% in December.

 

"We expect livestock markets to remain well supported almost regardless of global economic growth in 2012." However, cotton looked best kept "underweight", with disappointing trade data in China, the top consumer and importer, potentially signalling "lower cotton demand through February".

 

"Near-term macroeconomic concerns are likely to hit cotton more than other agriculture crops, while stocks have improved dramatically over the past two seasons." Indeed, potential upsets from the eurozone crisis or, given international pressure on Iran, for an oil shock meant that commodity rallies overall were "likely to be short lived". "While our forex strategists believe in the long-term strength of the euro, it seems unlikely that the eurozone's tough choices will be resolved within a bullish market," Friesen said. "Rather, the market's discipline will likely be needed again to avoid making poor choices."