Marketing Communication
Agri Commodity Markets Research
March 2018: Fasten Your Seatbelt – Volatility Is On
RaboResearch
Food & Agribusiness Trade war concerns bring uncertainty to agri markets – China and the EU are looking into retaliation as
the US imposed duties on steel imports. Weather across Argentine soy and corn, as well as across US
far.rabobank.com
winter wheat takes a toll on crops, but focus will soon shift to Black Sea weather, and US soy and corn
Stefan Vogel plantings, with expectations of a record US soy area. The sugar price will remain under pressure.
Head of ACMR
+44 20 7664 9523
Carlos Mera WHEAT
Senior Commodity
Analyst
Marginal price strength forecast, despite recent
+44 20 7664 9512
volatility
Charles Clack
Commodity Analyst  Rainfall across the US HRW belt is a welcome sight to
+44 20 7664 9756 deteriorating crops and has spooked the funds to sell
 Black Sea regional conditions have been largely
favourable so far – a wild card for 2018/19
 Rabobank maintains US 2018/19 planted area at 47m
acres, up 1.3m acres YOY
CORN
CBOT Corn price forecast remains constructive
 2017/18 stocks are forecast to erode, both for the US
and globally, albeit from record levels
 Drought prevails in Argentina, while Brazilian safrinha
plantings remain delayed
 US 2018 planted acres are forecast at 89.5m acres –
as price relativities favour soybeans
SOYBEANS
Our CBOT price forecast has been left unchanged,
with a more bearish tone into 2H 2018
 Argentine, Paraguayan, and Uruguayan production
lowered; Brazilian production on par with last year
 Northern hemisphere to soon become a focal point
for markets – where record-strong US crush rates
need to be balanced with bearish tones from forecast
record soy plantings and feared trade wars
PALM OIL
Bearish view maintained on palm oil prices, amid
continued large production and inventories
 The increase in Indian palm oil import duties and the
end of temporary Malaysian palm oil export tax
suspensions weigh on palm oil prices
 Malaysian and Indonesian March 2018 production are
expected to be higher month-on-month
1/12 RaboResearch | Agri Commodity Markets Research | March 2018
March 2018
SUGAR
ICE #11 Sugar price to remain under pressure
 The start of the Brazil harvest will provide market
guidance
 White premium seems to have stabilised
 India is having a huge crop next season, which
increases market estimates for the coming season
COFFEE
Price forecast increased in Q3 2018
 We expect bearish price pressure as the Brazilian
arabica harvest comes in
 The Battle for Espírito Santo rages on
 The end of La Niña makes a second consecutive
record crop in Vietnam less likely
COCOA
Change of sentiment in the cocoa market
 Low West African mid-crops ahead
 Prices will need to go high enough to at least
incentivise some increase in internal prices paid in
Côte d’Ivoire and Ghana
 Demand is doing better than expected
 Funds hold largest net long position since August
2016. We see a risk for a price break and volatility
COTTON
Bearish new-crop prices, as volatility remains in the
front end of the curve
 Volatility on the ICE #2 falls to playoff between
Managed Money longs and unfixed mill positions
 Global stocks forecast to grow 4m bales outside of
China in 2018/19 – the basis of our bearish outlook
 US planted area forecast at 13.1m acres, amid strong
price relativity vs. soybeans and corn
Wheat Global wheat forecasts maintained
unit Q3'17 Q4'17 Q1'18 Q2'18(f) Q3'18(f) Q4'18(f) Q1'19(f) Q2'19(f)
CBOT USc/bu 457 424 449 480 470 470 475 480
Matif EUR/t 164 161 159 170 168 173 175 175
Marginal price strength forecast, despite recent
volatility

 Rainfall across the US HRW belt is a welcome sight to

deteriorating crops and has spooked the funds to sell
 Poor US winter crop conditions are somewhat
reversible if spring weather occurs favourably
 Black Sea regional conditions have been largely
favourable so far – a wild card for 2018/19
 Rabobank maintains US 2018/19 planted area at 47m
acres, up 1.3m acres YOY
Source: Bloomberg, Rabobank 2018

Marginal strength is forecast across global wheat futures,

despite recent weather volatility. CBOT Wheat traded within a The Black Sea Region will again be a wild card in 2018/19 –

USc 61/bu range through March, as Matif covered a so far, regional conditions have been favourable, just as ideal

EUR 6/tonne range with meteorological concerns, particularly conditions emerge for spring plantings. Furthermore, recent

La Niña’s impact in the US Southern Plains, driving a cold weather is unlikely to have caused sizeable damage, only

considerable risk premium into the market – a factor the potential to delay plantings. Using a trend yield,

exaggerated by a 28,946-lot net long Managed Money expectations are for Russian output to reach 73m tonnes –

position across KCBT Wheat.
Broad rainfall across the US HRW belt is a very welcome
sight to deteriorating crops and has spooked the funds to sell,
but further relief is required to alleviate drought. This currently
looks possible in the 14-day period. For us, the big question is
as to whether La Niña has come to an end. Australia’s Bureau
of Meteorology recorded ENSO-neutral conditions, with others
(NOAA) highlighting a shift to normal conditions this spring.
Drought has degraded US crop conditions and hiked
abandonment, but this is somewhat reversible if spring
weather occurs favourably – expect spring markets to trade
weather. Furthermore, soil moisture in the Black Sea Region
has been reported as ideal for spring plantings – improving
production prospects in 2018/19. Rabobank maintains a
supportive wheat outlook, as eroding US supplies and
improved EU demand in 2018/19 drive support. We forecast
CBOT Wheat and Matif at USc 480/bu and EUR 170/tonne,
respectively, by Q4 2018.
Managed Money built a 28,946-lot net long position in KCBT
Wheat YTD amid US southern plains drought
80
down 11.5m tonnes YOY – to erode domestic stocks in
2018/19. Black Sea exports should remain at a high level in
2018/19, as swelling stocks this season will partly be exported
next season. An unlikely return to 2017/18 yields (at
3.1 tonnes/ha) could deliver another +83m-tonne crop –
something which would inject a very bearish influence into
2018/19 global markets if realised.
Rabobank maintains US 2018/19 planted area at 47m acres,
up 1.3m acres YOY, owing to both additional spring and winter
acres – up 7% and 2% YOY, respectively. This compares with
the USDA’s 46.5m-acre figure, as released at the 2018 Outlook
Forum. Despite the acreage rise, Rabobank expects the US
2018/19 balance sheet to tighten – for the second consecutive
year – taking ending stocks to a still-comfortable 810m bu.
New-season US exports are expected to remain under
pressure, as heavy Russian stocks allow the region to dominate
global trade – any Black Sea trade disruption will favour
Argentine and EU exports before the US.
Russian stocks are expected to decline marginally, by
1.6m tonnes, through 2018/19, as a trend yield emerges
16
900
14

60 800 12
Million tonnes

10
Thousand Contracts

40 700
US¢ / bushel

8
20 600
6

0 500
4

-20 400 2

0
-40 300
Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18

Managed Money Net Length KCBT Wheat (RHS) Ending Stocks

Source: CFTC, Bloomberg, Rabobank 2018 Source: USDA, Rabobank 2018

2/12 RaboResearch | Agri Commodity Markets Research | March 2018
Corn CBOT Corn price forecast maintained
unit Q3'17 Q4'17 Q1'18 Q2'18(f) Q3'18(f) Q4'18(f) Q1'19(f) Q2'19(f)
Corn USc/bu 359 346 362 370 390 370 380 385

CBOT Corn price forecast remains constructive

 2017/18 stocks are forecast to erode, both for the US

and globally, albeit from record levels
 Drought prevails in Argentina, while Brazilian safrinha
plantings remain delayed
 US 2018 planted acres are forecast at 89.5m acres –
down 0.7m acres YOY – as price relativities favour
soybeans
 Proposed EU duties on US corn imports to have little
impact on global pricing
Source: Bloomberg, Rabobank 2018

A supportive CBOT Corn outlook is maintained, despite a

volatile month, with Rabobank forecasting prices to average
USc 390/bu during Q3 2018. Fundamentally, 2017/18 stocks
are forecast to erode, both for the US and globally, albeit from
record levels. This tightening – assisted by current weather and
price drivers – is expected to assist the CBOT higher until the
northern hemisphere harvest extends price pressure. Expect
volatility to persist in the near term, amid speculative reactions
to South American weather and renewed focus on US 2018
planted acres.
South America yields remain a key concern, driving the
USDA to cut combined Brazilian and Argentine 2017/18 output
by 3.5m tonnes MOM. Drought prevails in Argentina, with
crops varying between grain-filling and harvest – crops are
rated 75% to 86% poor/very poor. Additional rainfall may still
benefit younger crops – but on the whole, the damage is done.
Rabobank has revised Argentine 2017/18 output to
33m tonnes, down 3.5m tonnes MOM. For Brazil, safrinha
plantings remain heavily delayed. High domestic premiums
drive safrinha plantings to 92% complete, down 4% YOY,
despite concerns that later-planted safrinha will see lower
yields and higher frost risk. Either additional plantings face
poor yields or, alternatively, are abandoned and yield zero –
Rabobank forecasts Brazilian production at 85.5m tonnes,
down from last year’s record of 98.5m tonnes.
The US enters a second consecutive deficit year in 2018/19,
as planted acres are forecast at 89.5m acres – down 0.7m acres
YOY – with price relativities favouring soybeans this coming
spring. US stocks have largely been anticipated to build in
2017/18, before competitive price positioning drove up US
export expectations – now at a near-record 2.2bn bu – to shift
US supplies into deficit. This stock erosion is forecast into
2018/19, amid lower year-on-year US acres and a projected
trend yield – a bullish trend for prices. 2018/19 stocks erode,
but only to comfortable 2015/16 levels, with stocks-to-usage
touching four-season lows.
The EU has proposed potential duties on US corn imports
as a response to steel and aluminium tariffs introduced by
Washington. This appears bearish at face value, but historical
trade volumes suggest otherwise. The EU imported just over
1m tonnes of US corn in 2016/17, a fraction of total US corn
exports of +58m tonnes for the season. As the US maintains
tariff free access to much larger import markets, Rabobank
expects any potential EU duties on US corn imports to have
little impact on prices unless EU/US trade conflicts intensify,
and perhaps shift into other products.

Brazilian and Argentine 2017/18 production prospects dip US ending stocks erode for the second consecutive year in
MOM, as unfavourable weather takes a stronger hold 2018/19, amid strong exports and a YOY fall in acreage
160
2.5 25%

140
2.0 20%
120
Billion bushels
Million tonnes

100
Stocks/Usage

1.5 15%

80
1.0 10%
60

40 0.5 5%

20
0.0 0%
0

Brazil Argentina Ending Stocks Stocks/Usage

Source: USDA, Rabobank 2018 Source: USDA, Rabobank 2018

3/12 RaboResearch | Agri Commodity Markets Research | March 2018

Soybeans
Our CBOT price forecast has been left unchanged,
with a more bearish tone into 2H 2018
 Argentine, Paraguayan, and Uruguayan production
lowered, while Brazilian production seen on par with last
year’s record
 Northern hemisphere to soon become a focal point for
markets – where record-strong US crush rates need to
be balanced with bearish tones from forecast record soy
plantings and feared trade wars
 Outlook for US soybean yields crucial to meet our
bearish price outlook
Our forecast continues to be bearish into the latter half of
this year. We anticipate record US soybean plantings,
combined with continued high yields, to add some price
pressure to markets. However, weather risks remain a concern,
and the bearish move will probably only take place once the
growing season provides markets with enough certainty of
favourable US yields.
Worst drought in four decades across Argentina cuts
soybean production below 40m tonnes – the lowest levels in
six years – as hot and dry weather continues to hurt the crop.
We have lowered our production forecast, from 46m tonnes
last month and 18m tonnes YOY. This revision takes forecast
further dry conditions through most of this month into
account. This will force the Argentine soybean crush down and
lower the country’s soymeal export potential to the lowest
since 2014/15. Global soymeal exports will thus fall to a four-
year low. The last time Argentine crush and meal exports
declined year-on-year was in the drought year 2012 – and at
that time, the shortfall was offset by a significant rise of
soybean exports out of the US and Brazil, as well as a rise in
soybean crush in destination markets like the EU and Asia. We
expect a similar market reaction this year. In addition, the
world then also benefited from a significant rise in global
rapeseed and sunflowerseed production and processing, a
situation we currently do not expect to see repeated in 2018.
US soybean plantings to reach record high, but good yields
required to meet global demand
Source: USDA, Rabobank 2018
4/12 RaboResearch | Agri Commodity Markets Research | March 2018
CBOT Soybean forecast cut marginally in the near-term
unit Q3'17 Q4'17 Q1'18 Q2'18(f) Q3'18(f) Q4'18(f) Q1'19(f) Q2'19(f)
Soybeans USc/bu 965 977 1,005 1,030 1,025 1,000 980 980
Source: Bloomberg, Rabobank 2018
Brazil’s soybean production forecast slightly above last
year’s 114m tonnes, which will help to supply some of the
shortfall of Argentina. However, the harvest is slowed by
ongoing rains, and so is the planting of safrinha corn. In
addition, the soybean crop in neighbouring countries Paraguay
and Uruguay is also reduced, as dry conditions have also
impacted crops there.
Market focus now turns to the northern hemisphere, where
record-strong crush rates are bullish, while forecast record soy
plantings and feared trade wars are bearish. We forecast
record-large US soybean plantings of close to 91m acres in
2018, up 1% YOY. However, growth will be limited by
expansions of other crops like cotton. Still, private analysts
recently showed survey-based forecasts of more than 92m
acres. Soybeans might get dragged into US/Chinese trade
wars, which would potentially be bearish for CBOT prices.
Market participants will have to prepare for potential
volatility, with funds heavily long and upcoming USDA planting
numbers by the end of this month. With the shortfall of South
American production and strong US crush, large northern
hemisphere plantings and favourable weather will be crucial.
Currently, the three-month outlook for US is favourable.
US long-term outlook calls for limited drought in traditional
soybean-producing areas
Source: NOAA, Rabobank 2018
 CBOT Soymeal and Soy oil forecasts left almost unchanged
Soymeal and Soy Oil Unit
Soy oil USc/lb
Q3'17
33.9
Q4'17
33.7
Q1'18
32.2
Q2'18(f) Q3'18(f) Q4'18(f) Q1'19(f) Q2'19(f)
32.2 33.0 32.5 32.5 33.0
Soymeal USD/tn 309 318 354 355 345 330 325 320

Soymeal forecast left almost unchanged, as the

shrinking Argentine crop is priced in, while pressure
looms from record US acreage and soymeal output
 US crush margins are favourable, supporting outlook
for record US soymeal production and exports
 Argentine soymeal production and exports to fall to a
three- to four-year low due to drought-reduced
soybean crop
 Soy oil to remain range-bound due to record US supply
forecast and pressure from high palm oil availability Source: Bloomberg, Rabobank 2018

further, requiring more meal production in destination markets

CBOT Soymeal prices expected to top out, despite an
ongoing worsening of the Argentine crop. Argentine soybeans,
now forecast at below 40m tonnes, will force a reduction in the
country’s soybean crush and soymeal exports. We forecast
Argentine soymeal exports to decline to the lowest in three to
four years. Still, CBOT is expected to soon focus more on
record US crush rates, heavy US meal supplies, and expected
record plantings, which will keep a ceiling on soymeal prices.
A well supplied US soymeal market and weak US basis
levels might take a toll on CBOT futures. US soybean crush
runs at record strong levels due to favourable margins, both
for nearby and throughout the year. We agree with USDA that
the US soybean crush in 2017/18 will show the largest increase
in three years, but see room for an even larger number than
USDA’s 1960m bu. Also USDA’s export forecast for US soymeal
seems reasonable considering the export pace and sales so far,
but could also be even larger. Despite a very strong US
soymeal demand, the record US crush might result in a glut of
soymeal and potential price pressure on soymeal futures.
The global supply of alternative protein meal is not
expected to improve sizeably in 2018, providing limited
opportunities to substitute the Argentine shortfall of soymeal.
With continued rising global livestock production, the demand
for soymeal as one of the primary vegetable proteins will grow
like Europe and Asia from exported US or Brazilian soybeans.
CBOT Soymeal prices might react bearish if soy also gets
dragged into the US/Chinese trade wars. If China introduces
import duties on US soybeans, the resulting bearish impact on
CBOT Soybeans will likely also pressure CBOT Soymeal.
Physical prices of South American soybeans and meal,
however, are expected to rise – the higher a potential duty, the
higher the expected price increase in South America, and the
more bearish CBOT is forecast to react.
Soy oil prices to remain rangebound, as record US crush in
2017/18 and healthy supplies of alternative oils keep a lid on
prices. Lower Argentine soy oil production is more than offset
by plentiful supplies of alternative oils – mainly palm oil – and
potentially reduced soy oil demand for Argentine biodiesel.
Funds cut their CBOT positions, but remain heavily long
CBOT Soymeal and extend their net short CBOT Soy Oil.
Soymeal/soy oil spread trading has been a common feature
over the past month, due to the Argentine drought. However,
recent worries about potential trade wars, which could involve
soy, seem to limit fund-buying.

Argentine soymeal exports to fall in 2017/18 – and to also Potential Chinese trade retaliation on imports for US
stay suppressed in 2018/19 soybeans would also impact CBOT Soymeal prices

100
90
Chinese Soybean Imports (mln t)

80
70
60
50
40
30
20
10
0
2010 2011 2012 2013 2014 2015 2016 2017

Brazil US Argentina others

Source: USDA, Rabobank 2018 Source: USDA, Rabobank 2018

5/12 RaboResearch | Agri Commodity Markets Research | March 2018
Palm Oil Palm oil price forecast lowered marginally in Q3 2018
unit Q3'17 Q4'17 Q1'18 Q2'18(f) Q3'18(f) Q4'18(f) Q1'19(f) Q2'19(f)
Palm Oil MYR/t 2,692 2,606 2,522 2,500 2,420 2,400 2,400 2,400
Bearish view maintained on palm oil prices, amid
continued large production and inventories

 The increase in Indian palm oil import duties and the

end of temporary Malaysian palm oil export tax
suspensions weigh on palm oil prices
 Malaysian and Indonesian March 2018 palm oil
production are expected to be higher month-on-
month
 High-consumption period of Ramadan will limit palm
oil price declines in Q2 2018
Source: Bloomberg, Rabobank 2018

Palm oil prices affected by the increase in Indian palm oil

import duties and the end of temporary Malaysian palm oil
export tax suspension. In early March 2018, the Indian
government implemented another round of palm oil import
duty hikes, while maintaining import duties for soft oils.
Effective import duty on CPO increased from 33% to 48.4%,
whereas effective import duty on RBD olein increased from
44% to 59.4%, which narrows the spread between landed palm
oil and soft oil prices in India. The spread between landed
prices of soft oils and Malaysian palm oil in India will become
even narrower in April 2018, as the temporary suspension of
Malaysian palm oil export taxes ends. We expect Indian palm
oil import demand to be negatively affected in the short term,
which will add more pressure to palm oil prices.
Malaysian and Indonesian March 2018 palm oil production
expected to rise month-on-month due to seasonality.
According to the MPOB, Malaysian February 2018 palm oil
production decreased by 15% MOM, to 1.3m tonnes, and
exports by 13% MOM, to 1.3m tonnes. Even though Malaysian
February 2018 palm oil inventories decreased by 3% MOM, to
2.5m tonnes, they are still 70% above the level seen a year ago.
Similarly, GAPKI reported that Indonesian palm oil inventories,
at 3.6m tonnes in January 2018, were 10% down on the month,
but 27% up on the year. We expect palm oil inventories in
Malaysia and Indonesia to remain high in March 2018, on the
back of expectations of rising seasonal palm oil production.
High consumption during Ramadan will limit a palm oil price
decrease in Q2 2018. Ramadan begins in mid-May this year
and typically sees higher demand for palm oil used in cooking.
We expect the pace of palm oil inventory building that was
noted over the past months in Malaysia and Indonesia to slow
in Q2 2018 due to this high-demand season, which will provide
support for palm oil prices. Due to the drop in palm oil prices
in early March 2018, we have lowered our Q1 2018 price
forecast to an average of MYR 2,500/tonne, while maintaining
our view of MYR 2,400/tonne for late 2018 and early next year.
Indonesia delayed new regulations on palm oil shipments,
which were issued in October 2017. These regulations initially
required Indonesian palm oil exporters to only use Indonesian
flagged vessels and Indonesian insurance companies from
April 2018 onwards, but the start date has recently been
postponed by a year. The law, if implemented, could have a
negative impact on palm oil export volumes from Indonesia
due to the limitation of Indonesian-flagged tanker availability –
but for the next 12 months, this won’t impact Indonesian palm
exports and prices.

Malaysian CPO production continues at a record pace, also in Palm oil inventories in Malaysia and Indonesia remain well
February 2018 above those of a year ago, maintaining pressure on prices
2.2 4.5

4
2
3.5
1.8
3
Million tonnes
Million tonnes

1.6 2.5

2
1.4
1.5
1.2 1

1 0.5

0
0.8

5-year high 5-year average 16/17 17/18 Indonesia Malaysia

Source: MPOB, Bloomberg, Rabobank 2018 Source: MPOB, GAPKI, Bloomberg, Rabobank 2018
6/12 RaboResearch | Agri Commodity Markets Research | March 2018
Sugar ICE #11 Sugar price forecast slightly lowered at the front
unit Q3'17 Q4'17 Q1'18 Q2'18(f) Q3'18(f) Q4'18(f) Q1'19(f) Q2'19(f)
Sugar USc/lb 14.0 14.6 13.7 13.2 14.1 14.5 14.7 14.7

ICE #11 Sugar price to remain under pressure

 The start of the Brazil harvest will provide market

guidance
 White premium seems to have stabilised
 India is having a huge crop next season, which
increases market estimates for the coming season

Source: Bloomberg, Rabobank 2018

All eyes are focused on the start of the Brazilian harvest.

With a global excess of sugar, we don’t expect the pace of the
sugarcane harvest to affect the ICE #11 level all too much. Any
interruption in the harvest due to unseasonal rains will
probably just alleviate the glut in the market and have no price
impact. But the pace of ethanol may prove to be relevant. At
the moment, most market players expect the sugar mix to
come towards a minimum, a level said to be at around 40% to
42%. Those expectations are based on a very high ethanol
parity, at close to USc 18/lb today. If the parity does not
plummet close to within two cents of the raw sugar price, all
mills will favour ethanol over sugar. However, as we approach
the start of the harvest in Brazil, we expect to see a decline in
ethanol prices. The pace of the decline will potentially adjust
expectations as to whether a minimum sugar mix will hold for
the whole of the harvest. For the time being, sales of ethanol
are doing very well as the economy recovers, with February
ethanol sales up 16% YOY. With declining stocks until the
harvest starts might result in a period of increased volatility.
But if ethanol prices edge higher – say because of a potential
delay to the start of the harvest – these prices should not be
taken as a sign that they will stay high throughout the season,
as the levels traded will probably be thin.
The white premium seems to have stabilised over the last
month, after a long period of decline. The October white
premium is at the same level as it was at the end of January or
at the end of February. However, unhedged Thai sugar may
put further pressure on the white premium. In the longer term,
it will be the planting decisions in the EU which will provide
further direction to the white premium, around April.
More bears in India. The announcement of ISMA stating that
Indian sugar production for the current season is now
estimated at a whopping 29.5m tonnes has sent the market
south, even though there were already private estimates in that
range. However, at the same time, raws dropped more than
whites, which makes us wonder as to whether the market
expects some of the Indian exportable surplus to be in the
form of raws. More importantly, most of the market believed
that the real big crop in India was going to be the next crop
(2018/19). As the market has been repeatedly increasing all
estimates for the current crop – and therefore the basis for all
future crops – then there remains a risk that the next harvest
(2018/19) may go from being a huge crop to becoming a
monster crop.

The pace of the fall in ethanol prices will be closely watched at The sugar white premium appears to have stabilised, after
the start of the sugarcane harvest pressure through the second half of 2017
2 100

1.9
90
1.8
80
1.7
USD/tonne
BRL/litre

1.6 70

1.5
60
1.4

1.3 50

1.2
40

Hydrous Ethanol Price - Sao Paulo

Sugar White Premium - October 2018 contract

Source: CEPEA, Bloomberg, Rabobank 2018 Source: Bloomberg, Rabobank 2018

7/12 RaboResearch | Agri Commodity Markets Research | March 2018

Coffee Price forecast lowered in the short term, but increased in Q3
unit Q3'17 Q4'17 Q1'18 Q2'18(f) Q3'18(f) Q4'18(f) Q1'19(f) Q2'19(f)
ICE Arabica USc/lb 132.3 124.7 121.7 124 133 133 133 133
ICE Robusta USD/t 2,096 1,857 1,776 1,810 1,850 1,850 1,850 1,850
Price forecast increased in Q3

 We expect bearish price pressure as the Brazilian

arabica harvest comes in
 The Battle for Espírito Santo rages on
 The end of La Niña makes a second consecutive record
crop in Vietnam less likely

Source: Bloomberg, Rabobank 2018

ICE Arabica continued subdued in March, with very little

news in the market. The May contract has gone from
USc 122/lb at the end of February to USc 119.4/lb as of
19 March. Stocks in non-producing countries, having
decreased significantly between September and October, have
now stabilised, and in some ports, they have been replenished.
Brazil’s internal market has seen some more movement after
carnival – and even though it has been quiet, that created an
impression of a large amount of unsold stocks from previous
crops, which is anyone’s guess.
The battle for Espírito Santo continues. In our view, after
two years of dry weather in some key Brazil robusta areas,
Brazil will see a significant year-on-year production increase,
but still at a lacklustre level (which we estimate at 15.8m bags)
compared to previous years. However, estimates for Brazil
robusta vary from 15m to 19m bags. The difference does not
come from Rondônia or Bahia, where there is widespread
agreement that the crop is excellent, but from Espírito Santo,
the key robusta-growing area in Brazil – and where all coffee
analysts are focused on. It makes you wonder about the
reliability of estimates. In any case, the higher availability of
conillons means that there will also be a high availability of
arabicas, but particularly so at the start of the harvest. As we
expect near-record numbers of arabica production in Espírito
Santo and Zona da Mata – the areas where the arabica harvest
starts (usually May) – spot differentials will weaken. However,
the follow-up in South of Minas may be disappointing, as we
expect a disappointing crop for what should be an upcycle.
The Honduran export pace continues to be very strong.
Whereas sales have now decelerated to last year’s level,
exports continue to be 13% higher (October-16 March). The
slow pace in Colombia has shifted demand towards Honduras
at the start of the crop, and the mid-crop in Colombia is likely
to continue to be on the low side. But as of now, it is not still
not certain as to whether total exports from Honduras will
finish above or below last year’s by the end of the season.
La Niña has come to an end, according to the Australian
Bureau of Meteorology. La Niña usually correlates with
increased rainfall over Indonesia and Vietnam. Indonesia
usually does not need extra rainfall, and it can sometimes be
counterproductive. But when it comes to Vietnam, some good
rainfall is always a good thing, especially to replenish the
reservoirs. For the time being and until we see actual rainfall
numbers at the start of the rainy season, we will assume that
Vietnam will have another very good crop, given the
continuous good prices. But this could change. If it does, then
the balance sheet will change from neutral to a deficit in
2018/19. With low and declining certified stocks, it could perk
up volatility.

The arabica areas that are harvested first (Zona da Mata and With a large difference between Brazilian and Colombian
Espírito Santo) will put pressure on the spot market crops, we see a large upside in implied volatility
18 40
Implied vol 100% moneyness -

16
35
14
annualised
Million bags

12
30
10

8 25
6

4 20

- 15
South of Zona da Cerrado São Espírito Espírito Other
Minas Mata Paulo Santo Santo (A&R)
(A) (R) Robusta Arabica
2016/17 2017/18 2018/19

Source: Rabobank 2018 Source: Bloomberg, Rabobank 2018

8/12 RaboResearch | Agri Commodity Markets Research | March 2018
Cocoa Price forecast slightly increased
unit Q3'17 Q4'17 Q1'18 Q2'18(f) Q3'18(f) Q4'18(f) Q1'19(f) Q2'19(f)
ICE NY USD/t 1,957 2,038 2,083 2,450 2,500 2,450 2,450 2,450
ICE London GBP/t 1,507 1,506 1,472 1,740 1,770 1,740 1,740 1,740
Change of sentiment in the cocoa market

 Low West African mid-crops ahead

 Prices will need to go high enough to at least
incentivise some increase in internal prices paid in
Côte d’Ivoire and Ghana
 Demand is doing better than expected
 Funds hold largest net long position since August
2016. We see a risk for a price break and volatility

Source: Bloomberg, Rabobank 2018

Cocoa has seen impressive upside momentum in February to be high enough to prompt the Ivorian government to go
and March. On 26 January, we made a very bullish call, ahead with a significant increase. How much of an increase will
expecting the market to go up by 12% in Q1. However, the be necessary to stop a significant fall is anyone’s guess.
market has been relentless and overshot our then-bullish
In the meantime, we cannot discard a price drop. The
forecast, to increase by almost 30%. There was a combination
momentum created by cocoa prices has attracted funds. Non-
of concerns about the West African mid-crops and low quality
Commercials are, as of 13 March, 33,693 lots net long, which is
of the crop arriving in Côte d’Ivoire, which seems to be quite
the longest net position since August 2016. The structure in
poor. This has been taken as a sign of the poor husbandry,
the market still shows contango at the front, and prices have
resulting from very low internal prices paid to farmers over the
been coming down from the peak on 14 March. This makes us
last year. Arrivals in Ivorian ports have started to decelerate,
believe funds may have an incentive to stop piling up long
and there is a distinctive risk that they will continue to do so.
contracts. It is also interesting to note that, during the market
Furthermore, Ghanaian officials publicly stated that the current
upswing, Non-Commercial gross shorts have stayed
crop in the country (2017/18) is well below what was expected
unchanged, at just over 50,000 lots since mid-February. These
(850,000 tonnes). The coming mid-crops are likely to
very brave funds must believe in dropping prices due to a
exacerbate the tightness in the market. With those declines in
potential surplus this year. It is unlikely they will change their
expected production, and with consumption still growing
view on the fundamental picture any time soon, but their
strongly, 2017/18 could turn from a surplus year into a deficit
beliefs may be challenged by large and potentially increasing
year.
margin calls. Adjust your seat belts, and expect a bumpy ride!
All eyes will be on a potential rise in the internal price paid
to farmers in Côte d’Ivoire. If there is not a sufficient increase, a
significant fall in production is likely, which could result in a
significant deficit in the 2018/19 season. The increase in prices
could come in time for the mid-crops, but it is also likely that
the next significant increase will only occur from October 2018
onwards. With this in mind, we believe the Q3 price will have

CFTC Non-Commercial net long position shows growth, but Despite above normal rains across west Africa the mid crops
could result in volatility are set to disappoint (18Feb-19Mar Rainfall Anomaly (mm))
120

100

80
Thousand lots (NY)

60

40

20

-20

-40

-60

Non-Commercial Net Position Non-Commercial Gross Long

Source: CFTC, Bloomberg, Rabobank 2018 Source: NOAA 2018

9/12 RaboResearch | Agri Commodity Markets Research | March 2018

Cotton ICE #2 Cotton forecast raised marginally in Q2 2018
unit Q3'17 Q4'17 Q1'18 Q2'18(f) Q3'18(f) Q4'18(f) Q1'19(f) Q2'19(f)
Cotton USc/lb 71 72 80 80 75 72 70 72
Bearish new-crop prices, as volatility remains in the
front end of the curve

 Volatility on the ICE #2 falls to playoff between

Managed Money longs and unfixed mill positions
 Global stocks forecast to grow 4m bales outside of
China in 2018/19 – the basis of our bearish outlook
 US planted area forecast at 13.1m acres, amid strong
price relativity vs. soybeans and corn. However,
persistent West Texas drought could limit this figure
Source: Bloomberg, Rabobank 2018

The nature of US cotton futures remain unpredictable in

the short term, with implied volatility on active May 2018
attaining near-contract highs through March. Historical ten-
day volatility also surged to contract highs, with a USc 3.5/lb
range traded month-to-date. Volatility on the ICE #2 falls to
the ongoing playoff between Managed Money longs and
unfixed on-call mill sales, currently 85,046 lots (as of 13 March)
and 79,306 lots (old crop contracts as of 9 March), respectively.
Interestingly, speculators are still a far cry from their January
record-long position, suggesting a top to this market is yet to
be found –short-lived breaks have been attempted above the
USc 84/lb mark. Mill fixations have been relatively steady as we
edge closer to July contract expiry. As a result, Rabobank raises
its nearby forecast marginally, while maintaining a strong
bearish view for 2H 2018. Levels above USc 78/lb for Dec 2018
flag up as exceptionally good value to new crop growers.
Global stocks forecast to grow 4m bales outside of China in
2018/19, a factor which forms the basis of our bearish outlook.
While 2018/19 stock growth is anticipated lower comparatively
vs. 2017/18 – where world excl. China stocks grew
+8.5m bales – higher exportable supplies will lessen supply
tightness and pressure prices. Rabobank forecasts strong
international prices to maintain continued high production in
2018/19 – particularly for the US, Brazil, India, and Pakistan –
but for a 3% increase in global consumption to lessen the size
of the surplus vs. 2017/18. When including China, global stocks
decline almost 6m bales in 2018/19, to 82m bales, as the
nation removes +10m bales from domestic 2018/19 stocks –
Chinese reserve auctions are underway, with 78.7% of the
cumulative total sold.
Rabobank looks to the USDA for short-term price direction,
in the form of the March 30 Prospective Plantings report and
weekly US export sales reports. Analyst estimates ahead of the
Prospective Planting report put US planted acres at between
13.0m and 13.5m acres, up from 12.6m acres in 2017/18 and
vs. Rabobank’s forecast 13.1m acres. Strong December 2018
price relativity vs. CBOT Soybeans and Corn should incentivise
additional year-on-year acres – although these could be
limited by persistent West Texas drought. On the export side,
US demand has been unexpectedly strong, but delays in recent
shipments have tempered this bullish demand influence. More
recently, the US has shipped almost 1m bales in the last
fortnight, allowing bales to flow to major importers and
reducing the sales/shipment gap marginally to 7.4m bales,
from a previous 7.6m bales. If the pace of shipments remains
unhindered, current demand could allow for 2017/18 US
exports sales to exceed the USDA’s 14.8m bales by some
margin – future revisions here will directly tighten the US
2017/18 balance sheet.

Global stocks outside of China are forecast to rise some US shipments have accelerated in recent weeks, allowing
4m bales in 2018/19, a bearish development bales to flow and strong importer demand to be satisfied
120 16
Accumulated exports (million bales)

100 14

12
80
Million bales

10
60
8

40
6

20 4

2
0

World (exc. China) Ending Stocks China Ending Stocks 2015/16 2016/17 2017/18

Source: USDA, Rabobank 2018 Source: USDA, Rabobank 2018

10/12 RaboResearch | Agri Commodity Markets Research | March 2018
Imprint
Rabobank Markets
RaboResearch
Food & Agribusiness
Corporate Risk & Treasury Management Contacts
far.rabobank.com
GLOBAL HEAD―Martijn Sorber
Agri Commodity Markets Research +31 30 21 69447
martijn.sorber@rabobank.com
Stefan Vogel, Head of ACMR
stefan.vogel@rabobank.com, +44 20 7664 9523 ASIA―Koon Koh Tan
+65 6230 6988
Carlos Mera, Senior Commodity Analyst
koonkoh.tan@rabobank.com
carlos.mera@rabobank.com, +44 20 7664 9512

Charles Clack, Commodity Analyst AUSTRALIA―Terry Allom

charles.clack@rabobank.com, +44 20 7664 9756 +61 2 8115 3103
terry.allom@rabobank.com

NETHERLANDS―Arjan Veerhoek
Contributing analysts:
+31 30 216 9040
Andy Duff―São Paulo, Brazil arjan.veerhoek@rabobank.com
andy.duff@rabobank.com
EUROPE―David Kane
Oscar Tjakra―Singapore +44 (20) 7664 9744
oscar.tjakra@rabobank.com david.kane@rabobank.com

NORTH AMERICA―Neil Williamson

+1 (212) 8086966
neil.williamson@rabobank.com

SOUTH AMERICA―Ricardo Rosa

+55 11 5503-7150
ricardo.rosa@rabobank.com

11/12 RaboResearch | Agri Commodity Markets Research | March 2018

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12/12 RaboResearch | Agri Commodity Markets Research | March 2018