London, October 2010

Key highlights: Since the last update in June (Macquarie Agri-view: Our mid-year price projections), Macquarie have become a lot more bullish across the agricultural and soft commodities complex.

"The agricultural sector has been afflicted by a series of weather events (much of which can be attributed to the transition from El Niño to La Niña), which have adversely impacted the production side. This has served to tighten the supply/demand outlook for many of the grains from the previously forecast comfortable situations, whilst reinforcing the existing tightness in many of the “softs”.

"The summer droughts in Russia, which decimated crops, sharply changed the erstwhile amply supplied wheat market. This in turn has led to the potential for a much tighter wheat and corn landscape, triggering renewed speculative interest in the grains/soy complex. With the balance sheets for these markets now tighter than expected, and as they compete for acreage in the next few months, prices will be supported higher.

"Dry weather is also raising concern for South America , potentially risking supply disruptions for sugar, coffee and soybeans for 2011. At the same time, recent heavy rains in Asia and Central America are maintaining upward price pressure on commodities such as cotton and arabica coffee, where import demand and export availability risk falling into mismatch yet again.

"For the new 2010/11 season, we are now bullish for corn, cotton and coffee , as these markets will remain fundamentally very tight. With low stocks/use ratios, prices in these markets risk spiralling higher should supply surprise on the downside. Lower US corn yields, coupled with strong corn demand from the feed, ethanol and export sectors, have made the fundamentals for corn particularly constructive.

"We are neutral-to-bullish for the sugar, wheat, and soybeans markets , where much of the price hikes seem to have already taken place, but which at least theoretically, should be moving towards more surplus conditions. For sugar, however, the risks are on the upside, as the expected 2010/11 surplus is considerably lower than originally hoped for and will not be sufficient to allow stocks to rebuild. The risk is also to the upside in the soybean market as prices must move in tandem with corn and cotton or risk losing a significant amount of acreage next year in the US. Much will depend on the next South American soybean crops to maintain comfortable world supplies. However, with oilseed demand surging higher in Asia, soybean prices should be well supported even if South America has another large crop in 2010/11.

"Finally, we are neutral-to-bearish for cocoa . Greater supply availability in West Africa should allow for small global surpluses to develop. However, as always, with cocoa, we need to allow for upside risks given the notoriously unpredictable supply-side in Côte d'Ivoire."

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