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China policy on agricultural reserves a “wildcard”

China’s handling of its state reserves of raw materials such as cotton and sugar will be a key factor shaping the direction of agricultural commodities in 2017, according to a major lender to agribusinesses.

China is “the most striking wildcard” that will drive agricultural markets, said Stefan Vogel, head of agri commodity markets at Rabobank, the Dutch lender that is a leading financier to farmers and agribusinesses around the world.

Any decision by China’s policymakers to begin selling down the country’s huge reserves would have a large impact on markets. “Whether China opens the stock floodgates or not will be a major price-driver in cotton and sugar – and potentially also in corn, soyabean or vegetable oil – markets in 2017,” the bank said in its report.

Beijing is looking to unload excess reserves built up under the government’s subsidy policy. It set minimum prices too high for commodities including cotton, sugar, and corn, and as those prices diverged from the market prices, authorities encouraged excessive production, as well as strong import flows.

Agricultural raw materials, especially the so called “soft commodities” such as sugar, coffee and cotton, have been among the top performers this year. The Bloomberg soft commodities index has gained 21 per cent, compared to 24 per cent for industrial metals and 1.5 per cent for energy. Grains have fallen about 3 per cent.

On the US, Rabobank said it was “cautious on the outlook” following the election as president this month of Donald Trump. The US president-elect has pledged to abandon trade agreements which could have “wide-reaching effects on American imports and exports of commodities” if trade agreements are revised.

Speculative trading of agricultural commodities has been a feature of the markets’ volatility in 2016, and Rabobank expects the trend to continue. With interest rates expected to rise only slowly, commodities are likely to attract hedge funds and other speculative investors looking for juicier returns, said the bank.

It predicts index funds, or those that track commodities indices, to be back in the agricultural market in the second half of 2017, as they look for a hedge against inflation.

Volatility in currency markets is also likely to be a factor for agricultural commodity prices in the next 12 months, with the euro likely to depreciate as a result of French, Dutch and German elections, Rabobank reckons.

Currency movements have had a strong impact on agricultural commodity prices this year, with the UK’s referendum on the EU leading to a sharp fall in the pound that pushed up the price of food imports and boosted agricultural exports. By contrast, the strengthening of the Brazilian real helped the surge in coffee and sugar prices as the country is the largest producer of both.

In terms of individual commodities, coffee prices, which are trading at about $1.62 a pound, are expected to decline significantly, with an especially bearish outlook on arabica coffee.

As consumers in developing countries continue to shift to meat-based diets, grains and oilseeds used as livestock feed are expected to see support. Soyabeans which are trading above $10 a bushel are expected to remain strong, while dairy prices are also expected to rise during 2017 as demand steadily increases, said the bank.

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