Agri Commodities Monthly January 2015 – US dollar strength exerts pressure on ags Marketing Communication Volatile currency markets continue to influence the outlook for agri commodity prices. Sustained US dollar strength is improving agri commodity prices outside of the US; shifting wheat trade flows, supporting prices of palm oil in MYR terms, as well as the local returns for sugar, coffee and non-US soybean producers.

WHEAT

SUGAR

CORN

COFFEE

SOYBEANS

COTTON

SOYMEAL &OIL

PALM OIL

Neutral to slightly bullish wheat price outlook, on lower US export demand and new crop uncertainty  Lacklustre US export demand will tether CBOT Wheat to corn as the market maintains a wheat-to-corn ratio of about 1.4 during Q1  Neutral outlook with counterbalancing forces keeping prices flat during Q1, with new crop concerns raising prices later in the year Neutral/bearish price outlook as global stocks build in 2014/15, potential for 2015/16 deficit  US stocks to increase 50 percent YOY in 2014/15, to the highest level since 2005/06  South American crop lower YOY, but global stocks still climb 10 percent YOY posting the highest stocks-to-use ratio since 2002/03  2015 US corn acreage to be down slightly YOY, stocks may decline into 2015/16

The price direction for soybeans remains bearish in anticipation of record South American harvest  Strong demand and weather concerns in northeastern Brazil supported prices so far  Record South American crop to bring supplybased price pressure  Reduced US winter wheat area will allow soybeans to pick up acres Soymeal to follow soybean prices lower, while low yields and tighter stocks provide support for oil  Wide crush margins encouraging traditional US importers to choose beans over meal  Lower soy oil yields are projected to tighten 2014/15 stocks to 1 billion pounds  Declining biofuel production resulting from low crude oil prices, adds risks for soy oil

Sugar prices remain subject to the direction of the Brazilian real, while tracking upwards though 2015  Short covering has driven an upward correction  Outside markets will continue to drive the direction of the ICE #11  Mild deficit of 1.8 million tonnes expected in 2014/15

Weather in Brazil is expected to drive volatility across coffee prices in February  Fresh concerns on another severe drought in 2015  February is a key month for the future direction of coffee prices, as Brazil’s 2015/16 crop estimates are finalised

Smaller Southern Hemisphere crops and acreage rebalancing will support cotton prices through 2015  China’s cotton imports tracking in line with expectations but Non-Commercials shift to a net short position  High quality cotton in strong demand, driving local basis spikes  US exports expected to reach 11 million bales Palm oil price outlook remains range bound  Large soybean crop and diminished biodiesel demand continues to weigh on price, limiting upside  Demand to remain muted from key consumer destinations  Little support to prices, with no major weather issue looming, while currency depriciation could support prices

* bullish/bearish graphics represent the direction of Rabobank’s price forecast through the next four quarters, from current price levels

Agri Commodity Markets Research (ACMR) [email protected] +44 20 7664 9514

January 2015

WHEAT CBOT Wheat price forecasts revised higher unit US¢/bu EUR/t

CBOT Matif

Neutral to slightly bullish wheat price outlook on lower US export demand and new crop uncertainty  Strong global demand for wheat will be picked up by the EU and other origins while US wheat is still uncompetitive because of the strong USD  Neutral outlook with counterbalancing forces keeping prices flat during Q1, with new crop concerns raising prices later in the year

Q1'14 617 201

Q2'14 649 200

Q3'14 528 172

Q4'14 556 176

Q1'15(f) Q2'15(f) Q3'15(f) Q4'15(f) 550 570 570 580 185 190 190 195

900 850

USc / bushel

800 750 700 650 600 550 500 450 400

CBOT Wheat

Previous forecast

Rabobank forecast

Source: Bloomberg, Rabobank, 2015

Rabobank has a neutral/slightly bullish view on wheat prices over the coming months, as demand for wheat remains strong and global production in 2015/16 is forecast to fall short of the previous year’s output. CBOT Wheat is projected to strengthen slightly to levels of USc 570/bushel to USc 580 /bushel over the course of 2015 and Matif Wheat prices are projected to be neutral to slightly bullish. The USDA revised down Russian 2014/15 wheat exports by 2 million tonnes from previous estimates because of the export duty (active February - June 2015) and the EU has to fill most of this export gap. Foreign exchange rates will continue looming over the global wheat export market, influencing competitiveness. The US dollar value setting multi-year highs has played a key role in sluggish US exports, as it coincides with historically low values for the euro and the ruble. As the wide spread is expected to persist through H1 2015, global wheat prices will be supported by relatively expensive US FOBs. With lower YOY US exports this season, limited only to traditional customers, CBOT wheat will not receive significant upward price pressure from exports until global FOB prices increase to US levels. On the other side, strong export demand and the weak euro will support Matif prices and keep them in the EUR 180/tonne to EUR 200/tonne range. The January WASDE provided a mixed picture for wheat and contributed to the neutral sentiment in the market. The USDA increased all wheat ending stocks by 33 million bushels to 687 million bushels, yet planted area was down 1.95 million acres YOY. The lower planted acres was more of a surprising, than bullish data release, as normal yields could still result in superior production from last year. Using average yields, HRW wheat production in 2015 would actually be able to increase by about 10 percent to 15 percent, despite the 3 percent reduction in planted area, and thus build stocks. However, SRW supply could get tighter as the 12 percent YOY reduction in plantings could decrease production by 10 percent to 15 percent and provide some positive support to new crop prices. US wheat exports moving at same pace as 2012/13 drought year

Year-over-year decline in US winter wheat acres

30

Million tonnes

25 20 15 10 5 0 Week 5 year average

Source: USDA, Rabobank, 2015

January 2015

2012/13

2013/14

2014/15

Source: USDA, Rabobank, 2015

CORN CBOT Corn price forecast revised marginally unit US¢/bu

Corn

Q2'14 477

Q3'14 359

Q4'14 372

Q1'15(f) Q2'15(f) Q3'15(f) Q4'15(f) 380 390 355 380

800 750 700 650

USc / bushel

Neutral/bearish price outlook as global stocks build in 2014/15, potential for 2015/16 deficit  US stocks to increase 50 percent YOY in 2014/15, to the highest level since 2005/06  South American crop production lower YOY, but global stocks still climb 10 percent YOY posting the highest stocks-to-use ratio since 2002/03  2015 US corn acreage to be down slightly YOY, stocks may decline into 2015/16

Q1'14 453

600 550 500 450 400 350 300

CBOT Corn

Previous forecast

Rabobank forecast

Source: Bloomberg, Rabobank, 2015

Rabobank’s corn outlook is still neutral to slightly bearish from the current price level of near USD 3.87/bu, with an expected price dip when the 2015/16 US corn crop becomes available. Prices have declined since the USDA’s January report, despite a downward revision of 6 percent to US ending stocks. Much of the decline was due to US corn yields dropping from 173.4 bu/ac to 171.7 bu/ac. While lower, the new numbers still represent records for production and yield. 1 December 2014 US corn stocks, as reported by the USDA, reached 11.2 billion bushel, up 7 percent YOY. Estimated ending stocks for 2014/15 are more than 50 percent higher YOY, the highest since 2005/06. We forecast prices to average USD 3.80 to 3.90/bu in 1H 2015,declining during the harvest to USD 3.55/bu, before strengthening again in the last quarter. The 2015 South American corn crop is forecast to fall YOY, with Argentina’s production down 3 million tonnes (at 22 million tonnes) and Brazil down 4 million tonnes (at 75 million tonnes). Global demand is on track to post growth of more than 22 million tonnes (over 2 percent) in 2014/15. Still, worldwide stocks are forecast to increase by 10 percent YOY by the end of 2014/15, pushing the stocks-to-use ratio up to 19.5 percent, the highest level in more than ten years. While this increase justifies a bearish corn price projection, we are cautious as our forecast for the 2015/16 season calls for demand to slightly outpace supply due to fewer planted acres in the US versus persistent corn for ethanol usage. Prices are expected to curb global demand growth just enough to avoid a substantial global deficit. Fewer year on year US corn plantings in 2015 are expected to be the next potential fundamental support point for global corn prices. The 2 million acre decline in US winter wheat planting will allow corn and soybeans to pick up some of these areas in 2015. With new pricing and stocks level forecasts, we raise our planting forecast to 89.2 million acres in 2015, which is still below those of the previous year. However, assuming a trend yield of 163 bu/ac, production would still fall by 5 percent YOY. Corn use for ethanol production in the US is expected to remain between 5.1 billion bushels and 5.2 billion bushels, despite the low crude oil and gasoline prices. Thus, US corn stocks have an increased probability of showing a deficit by the end of 2015/16. While Brazilian and Argentine corn area and production is projected to recover in 2016, this will not likely offset the projected production decline in the US. We maintain our outlook for price support near the time of Northern Hemisphere planting. Under normal conditions, we do not expect prices to be sustainable above USD 4.15/bu. Global ending stocks for 2014/15 to increase 10 percent YOY, taking the stocks-to-use ratio to a 12-year high 220

38%

200

110

33%

23% 140 18%

120

13%

100 80

Million bushels

28%

160

105

Stocks/Usage

180

Million tonnes

2014/15 corn used for ethanol on pace to meet 5.15 billion bushel projection

100

95

90

8%

Weekly corn usage f or ethanol Ending Stocks

Source: USDA, Rabobank, 2015

January 2015

Stocks/Usage

Weekly production to reach 5 billion bushels

Source: EIA, USDA, Rabobank, 2015

SOYBEANS CBOT Soybean price forecast adjusted on recent price support Soybeans

The price direction for soybeans remains bearish in anticipation of record South American harvest  Strong demand and weather concerns in north-eastern Brazil supported prices so far  Record South American crop to bring supplybased price pressure  US 2015 soybean area to expand and to reach a record level. Considering trend yields US stocks should further build

unit US¢/bu

Q1'14 1357

Q2'14 1468

Q3'14 1145

Q4'14 1007

Q1'15(f) Q2'15(f) Q3'15(f) Q4'15(f) 1000 975 935 900

1650

USc / bushel

1550 1450 1350 1250 1150 1050 950 850

CBOT Soybeans

Previous forecast

Rabobank forecast

Source: Bloomberg, Rabobank, 2015

Rabobank’s soybean price outlook remains bearish. Soybean futures have recently fallen below the USD 10/bu level. Strong US exports and dry weather across north-eastern Brazil had given support to soybean prices. But after the USDA’s January reports, prices have dropped significantly, and we still project prices to decline close to USD 9/bu during 2015. Global demand might not be able to absorb all of the expected growth in production. Chinese soybean demand is on track to justify a marketing year import volume of 73 million tonnes. Not only the Chinese will increase purchases this marketing year, but US exports so far this season to other Asian destinations and to Europe are up by about one third, due to good crush margins. In its last report the USDA increased US soybean exports for 2014/15 from 1,760 million bushels to 1,770 million bushels to acknowledge this strong demand, but given some other minor changes, US ending stocks are still forecast unchanged at 410 million bushels. Soybean production in Brazil and Argentina is expected to increase 10 million tonnes YOY, or 7 percent, in 2015. We still expect prices to fall further in 2015, as the record South American crop becomes available. The weather in Brazil has been favourable for most of the growing season, but dry weather in north-eastern Brazil in January has raised concerns, as crops in those regions are under stress. However, the crop losses in these areas should be relatively small, and good conditions elsewhere will ensure the supply of a record-large crop. Expectations of 98 million tonnes of soybeans in Brazil, as hoped by some market participants in early January, will not materialise, but the crops should still reach between 93 million and 96 million tonnes. We are also maintaining our estimate of 55 million tonnes for Argentina. We estimate that US soybean plantings will be up by about 2 million acres YOY in 2015. This is lower than in our previous projections, given that the soy-corn price ratio no longer represents the clear advantage of soybeans over corn, as it did last fall. The US soybean area will also benefit from lower US winter wheat plantings. Assuming a trend yield, the US will still be able to build stocks in 2015/16.

240

140

235

120

230

100

225

80

220

60

215

40

210

20

205

0

200

Soybeans

Source: USDA, Rabobank, 2015

January 2015

Corn and Wheat

Production in Brazil and Argentina to increase 7 percent YOY to reach new record levels, despite some concerns of crop stress 160

Production (billion bushels)

160

Total planted area (million acres)

Area by crop (million acres)

US growers will increase soybean plantings by 1 million to 2 million acres YOY, primarily replacing lower winter wheat acres

140 120 100 80 60 40 20 0

Total

Brazil

Source: USDA, Rabobank, 2015

Argentina

SOYMEAL AND OIL

CBOT Soymeal and Soy oil price forecasts revised lower

USD / ton

Soymeal to follow soybean prices lower, while low yields and tighter stocks provide support for oil  Wide crush margins encouraging traditional US export destinations to import more soybeans and less meal  Lower oil yields of soybeans are projected to tighten US 2014/15 stocks to 1 billion pounds  Declining biofuel production, resulting from low crude oil prices, adds price risks for soy oil

Q1'14 39.8 447

Q2'14 40.7 482

Q3'14 34.2 395

Q4'14 32.5 368

Q1'15(f) Q2'15(f) Q3'15(f) Q4'15(f) 32.8 32.0 31.0 29.8 350 340 325 315

550

60

500

55

450

50

400

45

350

40

300

35

250

30

200

25

CBOT Soybean Meal (LHS)

CBOT Soybean Meal Forecast (LHS)

CBOT Soybean Meal previous f orecast (LHS)

CBOT Soybean Oil (RHS)

CBOT Forecast (RHS) CBOT Soybean Soybean Oil Meal Forecast (LHS)

CBOT Soybean Oil previous orecast (RHS) Forecast f(RHS)

USc / lb

Unit US¢/lb US$/tn

Soy Oil Soymeal

Source: Bloomberg, Rabobank, 2015

As we enter 2015, a shift is taking place as soy oil is expected to gain share of the crush on soymeal. This is a result of more stability in soy oil futures prices versus last year’s crash. However, soy oil basis levels will remain higher than expected throughout the year, due to expected tight stocks. While we expect soymeal will follow soybean futures lower, with record South American production and expected record planted US soybean acres. There are two factors keeping soy oil futures from collapsing. As discussed in the past, US soy oil stocks will remain relatively tight versus the last several years. The current forecast puts 2014/15 soy oil ending stocks hovering around the 1 billion pound mark. As of the end of the December, NOPA stocks were at 1.068 billion lbs. One reason for tight stocks is the low soy oil yield, which will keep production constrained. Our lower oil yield forecast will reduce production by approximately 300 million lbs for 2014/15. The November figure of 11.1 lbs/bushel is a good indicator of what the crop year average will be. The December yield was slightly higher at 11.18 lbs/bushel, but is still well below past years. We are currently forecasting 11.2 lbs/bushel for the crop year, which would be the lowest yield since the 2009/10 crop year. Exportable supplies of vegetable oil have been siphoned off to fulfil biodiesel mandates around the world, but falling crude oil prices may change that. This is particularly true in Argentina and Brazil, where biodiesel production is expected to decline. This will put soy oil back on the world market, hurting US export prospects. A dichotomy has developed in US soymeal exports, in a year when the market was very optimistic about export potential. Currently, undelivered sales are running 56 percent ahead of the last year, but accumulated shipments are running 12.5 percent behind last year’s pace. Wide crush margins have likely encouraged importers with crush capacity to import soybeans and forgo importing meal. If this trend continues, US crushers may need to trim crush volumes, which would add stocks back to the soybean balance sheet, but lower crush will further tighten the soy oil balance sheet. US soy oil yields are at the lowest levels since 2009/10 12.20

US soybean crush margins well above previous years due to high prices of meal and oil 250

Soybean crush margin (USc/bu)

12.00

Pounds per bushel

11.80 11.60 11.40 11.20 11.00 10.80 10.60

2010/11

150

100

50

0

2011/12

Source: NOPA, Rabobank, 2015

January 2015

200

2012/13

2013/14

2014/15

2012/13

Source: Bloomberg, Rabobank, 2015

2013/14

2014/15

PALM OIL MDE-Bursa Palm Oil prices adjusted marginally higher unit MYR/t

Palm Oil

Q2'14(f) 2566

Q3'14 2221

Q4'14 2195

Q1'15(f) Q2'15(f) Q3'15(f) Q4'15(f) 2300 2325 2280 2240

3750 3500 MYR / tonne

Palm oil price outlook remains range bound  Large soybean crop and diminished biodiesel demand continue to weigh on price, limiting upside  Demand to remain muted from key consumer destinations  Little support to prices, with no major weather issue looming, while currency depriciation could support prices

Q1'14 2693

3250 3000 2750 2500 2250 2000

MDE-Bursa Palm Oil

Previous forecast

Rabobank forecast

Source: Bloomberg, Rabobank, 2015

Supply constraints and depreciation of Malaysian ringgit are supportive of palm prices in the short term. However, the good soybean crop outlook in Latin America continues to weigh on palm prices, limiting the near-term upside. The Latin American soybean crop is expected to increase by 6% YOY to a record 165 million tonnes keeping pressure in oilseed complex and palm. MDE-Bursa Palm prices have increased by 5 percent since Dececember2014, largely driven by constrained palm oil supplies and the weakening of the Malaysian ringgit, which depreciated by 6 percent during the period. Despite constrained crude palm oil supplies, the MDE-Bursa Palm price is expected to remain range bound over the short term. Constrained palm oil production to reduce inventory levels in the near months. According to MPOB, Malaysia’s December palm oil production dipped to a four-year low of 1.36 million tonnes. Production was down by 22 percent MOM and 18 percent YOY, largely driven by the floods in Eastern parts of Peninsular Malaysia. Despite lower production and weaker export results, stocks remain marginally higher than previous year levels, at above 2 million tonnes or 1 percent. Since the palm production cycle is moving towards seasonal lows, stocks may decline below 2 million tonnes in the coming months, before they start rebuilding. Demand is tapering, and weak consumer and biodiesel demand continue to weigh on prices. Purchases from key buyers, India and China, are slow. India’s December imports dropped for the first time in six months after domestic stocks and pipelines climbed to record levels, breaching the 2 million tonne mark. India’s January imports could decline by up to 15 percent MOM. Chinese palm oil demand is also expected to remain slow, as soybean imports are still holding up well, while the Chinese government intends to release large oil reserves held in the past. According to surveillance agency Intertek, Malaysian palm oil export are down by 23 percent for the first 20 days of January. Biodiesel demand remains lacklustre following the crude oil price decline. The crude oil discount to palm oil is hovering around USD 300/tonne, curtailing any discretionary demand for biodiesel and posing a challenge for governments looking to implement biodiesel mandates. Malaysian stocks remain higher than the last year in December 2.8

MDE-Bursa CPO premium over Brent Crude remains around USD 300/tonne 1000

800

280

2.2 2.0 1.8

160

600 500 400

40

300

1.6

200

1.4

-80

100 0

1.2

5yr range

Source: MPOB, Rabobank, 2015

5yr avg

13/14

14/15

-200

MDE Bursa CPO - Brent (RHS)

Source: Bloomberg, Rabobank, 2015

MDE Bursa CPO

ICE Brent

USD/tonne

700 USD/tonne

Million tonnes

2.4

January 2015

400

900

2.6

SUGAR H1 2015 sugar price forecasts lowered, upward trend maintained unit US¢/lb

Sugar

Sugar prices remain subject to the direction of the Brazilian real, while tracking upwards though 2015  CIDE tax from February lifts the hydrous ethanol price ceiling and supports the ICE #11  Outside markets will continue to drive the direction of the ICE #11  Mild deficit of 1.8 million tonnes expected in 2014/15

Q1'14 16.4

Q2'14 17.3

Q3'14 15.9

Q4'14 15.8

Q1'15(f) Q2'15(f) Q3'15(f) Q4'15(f) 15.5 16.5 17.0 17.5

32

USc / pound

29 26 23 20 17 14

ICE No. 11 Sugar

Previous forecast

Rabobank forecast

Source: Bloomberg, Rabobank, 2015

Sugar prices have found a base of support in mid-January, and the upward price forecast remains in place, despite persistent headwinds. The nearby ICE #11 has managed to rally near 12 percent over the last three weeks, breaking out of a seven-month downtrend, while traversing a complex range of economic, political and weather-related drivers. Noncommercial short covering has featured strongly in the upward correction, having commenced the year at a near recordlarge net short position. While producers have sold heavily into rallies, there is a lot more sugar to price in the coming months, particularly from the Thais. Coupled with persistent US dollar strength, the headwinds for sugar—a volatile Brazilian real, weak oil price outlook, record-large sugar stocks and the possible reintroduction of an Indian export subsidy—remain. Our nearby sugar price forecasts have been adjusted lower to USc 15.5/lb through Q1 2015—assuming a Brazilian real of 2.6 to 2.75—edging below our November estimate, following extensive crude oil price weakness. We continue to expect the world sugar supply and demand balance to transition into a modest deficit of 1.8 million tonnes during 2014/15, maintaining our longer-dated price forecasts of an increase to USc 17.5/lb in Q4. Sugar prices are expected to maintain a close correlation with the real through 2015, which is forecast to ease from 2.75 against the US dollar on a three-month basis, to 2.9 in 12 months. Despite reaching 11-year highs, the US dollar index continues to surge, with additional strength anticipated through the year. Shifts in Brazilian interest rates and policy reforms, such as the reintroduction of the CIDE tax, will be critical drivers of the Brazilian real and associated sugar prices. The announcement of the CIDE tax (from 1st February) has been supportive of the ICE #11, as gasoline prices will increase by some BRL 0.22/litre. This lifts the ceiling price of hydrous ethanol from a sugar equivalent of USc 15.4/lb to USc 17.3/lb. This on its own would be expected to support a cane mix in favour of ethanol production during the 2015/16 harvest, despite a weak real, but there is still a risk that Petrobras could revise gasoline prices lower in light of weaker oil prices, something which would offset the impact of the CIDE tax and therefore limit the extent to which ethanol prices would rise.

130

18

95

80

17

30

16

-20

15

-70

14

-120

13

100 100

90 80

105

70

110

60 115

50 40 Jan 14

120 Mar 14

May 14

ICE #11 March 15

Source: Bloomberg, Rabobank, 2015

January 2015

Jul 14

Sep 14

Brent Crude

Nov 14

Jan 15

Thousand Contracts

Index, 100=1/1/2014

110

90

Index, 100=1/1/2014

120

Despite extensive short covering, Non-commercial participants still maintain a large net short position

Non-Commercial Net Length

USD/BRL (RHS)

Source: Bloomberg, Rabobank, 2015

ICE No. 11 Sugar (RHS)

US¢/lb

After following Crude lower for much of December, the ICE #11 has found support, even outpacing the gains in the Brazilian real

COFFEE Long dated coffee price forecasts increased unit US¢/lb US$/t

ICE Liffe

Q2'14(f) 184.7 2046

Q3'14 181.5 2003

Q4'14 189.6 2031

Q1'15(f) Q2'15(f) Q3'15(f) Q4'15(f) 180.0 210.0 200.0 190.0 2000 2300 2300 2200

280 260 240 USc / pound

Weather in Brazil is expected to drive volatility across coffee prices in February  Fresh concerns on another severe drought in 2015  February is a key month for the future direction of coffee prices, as Brazil’s 2015/16 crop estimates are finalised

Q1'14 153.0 1931

220 200 180 160 140 120 100

ICE NY coffee

Previous forecast

Rabobank forecast

Source: Bloomberg, Rabobank, 2015

Nearby coffee price forecast revised lower following index fund rebalancing, and a larger-than-expected build in stocks in non-producing countries. The weather in Brazil has been the key driver of the coffee market. Accumulated rainfall to 18 January in the key non-irrigated area of Minas Gerais is at only 47 mm, which compares badly with the 71 mm in the same time period in 2014 (the start of an unprecedented drought during the otherwise rainy season) and the historical average of 143 mm. The probability of another extended drought through February 2015 is very small, as 100 mm is predicted in the ten-day forecast, but there is great concern for the trees that already have an accumulated water deficit of 150 mm since August 2014 and 370 mm since January 2014. Implied volatility derived from Arabica options, at over 40 percent (second month), is justified by widely different views on the Brazil 2015/16 crop. It is too early for a definitive Brazil crop estimate, but we believe the erratic rainfall pattern seen over the last year means that estimates above 30 million bags of Arabica are on the optimistic side. Bearish signals abounded in the last three months. Registered production in Colombia in calendar year 2014 came in at 12.1 million bags, an 11.5 percent increase on 2013. We expect the 2014/15 crop to reach 13.2 million bags, as the renovation programme will increase production in a mechanical manner as more renovated area comes into production after being replanted with high-yielding, rust-resistant varieties. Brazil’s 2014 coffee exports came in at 36.3 million bags, a whopping increase on 2013 of 5.1 million bags, despite the 2014/15 crop being significantly smaller. This export prowess would not have been possible without the steep devaluation of the real that created incredibly high internal prices. Furthermore, coffee demand was weaker than expected in a year where global temperatures reached record highs. A good Colombian crop and a slight recovery in Central American production will not be enough to offset losses in Brazil, Vietnam and Indonesia. Destocking in Brazil cannot go on forever, and at some point beyond January exports will have to come down, regardless of the valuation of the real. Weakness of real to keep internal prices in Brazil at historically high levels

Brazilian exports will have to decelerate at some point in 2015

2.8

38

2.6

36 34

2.2

Million bags

USD/BRL

2.4

2.0 1.8 1.6

32 30 28 26 24

1.4

22

1.2

20

Brazilian real spot

Source: Bloomberg, Rabobank, 2015

January 2015

Green Arabica

Green Conillon

Source: Bloomberg, Rabobank, 2015

Soluble

Roasted

COTTON Cotton price forecast maintained unit US¢/lb

Cotton

Smaller Southern Hemisphere cotton crops, and acreage rebalancing will provide mild support for the ICE #2 through 2015  China’s cotton imports tracking in line with expectations, but Non-commercials shift to a net short position  High-quality cotton in strong demand, driving strong basis levels  US exports expected to reach 11 million bales, ahead of the USDAs current target

Q1'14 88.0

Q2'14 88.6

Q3'14 66.7

Q4'14 62.0

Q1'15(f) Q2'15(f) Q3'15(f) Q4'15(f) 62.5 65.0 70.0 73.0

170

USc / pound

150 130 110 90 70 50

ICE NY No. 2 cotton

Previous forecast

Rabobank forecast

Source: Bloomberg, Rabobank, 2015

Cotton prices are expected to remain subdued through Q1, ahead of acreage rebalancing and YOY reductions in Southern Hemisphere production. These factors will provide mild support for the ICE #2 through 2015, above current levels. However, the cotton market is facing both volume and fibre quality challenges, and this will take some time to work through. International stock levels continue to bulge to new record highs—almost commensurate to a year of use, at 108.6 million tonnes—while the demand side outlook for cotton remains weak, at least for base grade fibre. Our Q1 2015 price forecast remains at USc 62.5/lb, and the ICE #2 will likely edge above current price levels on improved US export sales now that the crop is flowing. Looking ahead, declining world cotton plantings—in light of stronger margins from alternate summer crops—will limit the additional build in stocks, providing some price support. China’s cotton imports for the first five months of the 2014/15 marketing year to date were 45 percent below those of the same period last year. This is in line with our expectations for a 40 percent YOY reduction across the full marketing year, to 8.56 million bales, and the USDA’s expectations of a 50 percent YOY reduction. However, strong demand for highquality cotton grades is driving elevated basis levels in Australia and the US. Nonetheless, non-commercial participants have increased their gross shorts considerably through January and established a net short position of 6,554 lots (as of 13/1/2015). This has occurred despite government intervention in a number of cotton markets—looking to provide a base price for local producers—and has contributed to the 3 percent decline in March ‘15 futures over the course of 2015. US export sales have been improving in recent weeks and, in our view, are on track to exceed the USDA’s 10 million bale export target. US export commitments are at some 7.96 million bales to-date, with a mere 68,000 bales of weekly sales required for the remainder of the marketing year to meet the USDA’s target. Sales growth not only to China, but also to Vietnam and Indonesia has been notable in recent weeks, up 62%, 159% and 69% on YOY levels respectively. While China’s cotton imports may well slow in Q2, pending the release of quota, we expect an upward revision in the USDA’s domestic export target, to 11 million bales. Sales growth is expected to remain strong now that the crop is flowing, and this is likely to limit further downside price corrections in the ICE #2.

95

50

90

40

85

30

80

20

75

10

70

0

65

-10

60

-20

55

-30

50

Non-Commercial Net Length

Source: Bloomberg, Rabobank, 2015

January 2015

ICE NY Cotton (RHS)

US export commitments are tracking ahead of MY 2013/14 levels in a number of key export markets, lagging in others 2.5

2.0

Milion bales

60

USc / lb

Thousand contracts

Non-Commercial participants have re-established a modest net short position early in 2015 pressuring the ICE #2 lower

1.5

1.0

0.5

0.0

2015 MYTD

Source: USDA, Rabobank, 2015

2014

2013

Food & Agribusiness Research and Advisory Agri Commodity Markets Research (ACMR):

Global Financial Markets Corporate Risk & Treasury Management Contacts:

Stefan Vogel―Head of ACMR Global Strategist – Grains and Oilseeds +44 20 7664 9523 [email protected]

GLOBAL HEAD―Martijn Sorber +31 30 21 69447 [email protected]

Tracey Allen―Commodities Analyst +44 20 7664 9514 [email protected]

ASIA―Koon Koh Tan +65 6230 6987 [email protected]

Carlos Mera―Senior Commodities Analyst +44 20 7664 9512 ca[email protected] [email protected] +44 20 7664 9676 Contributing Analysts: Sterling Liddell― Saint Louis, United States [email protected] Pawan Kumar―Singapore [email protected] Steve Nicholson― Saint Louis, United States [email protected] Al Griffin―Saint Louis, United States [email protected]

AUSTRALIA―Terry Allom +61 2 8115 3103 [email protected] NETHERLANDS―Arjan Veerhoek +31 30 216 9040 [email protected] EUROPE―Eliana de Rossi +44 20 7664 9649 [email protected] NORTH AMERICA―David Teakle +1 212 808 6877 [email protected] SOUTH AMERICA – Sergio Nakashima +55 11 5503-7150 [email protected]

Charlie Clack―London, United Kingdom [email protected] www.rabotransact.com

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January 2015