London, 26 March 2011

Macquarie Agri-view: The devastating earthquake, tsunami and ensuing nuclear radiation that hit Japan will, in our view, have a net positive impact on global agricultural markets. Initially demand for feed grains may fall as the country is forced to operate with less capacity while damage and logistics are assessed.

But the need to source already-processed foods and meat due to damaged processing facilities, warehouses and loss of livestock – as well as demand for protein replacements and uncontaminated foods – should boost overall imports in the short term. While economic losses and reconstruction spending may affect demand in the medium term, it is unlikely to be large.

Latest market update

The Japanese disaster led to big sell off across the commodities as speculators rushed to safe haven assets. But the lower prices have been a boon to physical buyers, who have seized the opportunity to build coverage at a time of still falling stocks. While some commodity prices such as sugar and cotton may have peaked now, these low inventories and the fact that new crop supplies are still a while away, will ensure prices stay well supported.

Sugar : Prices are recovering from last week's sharp sell-off, to stand at 27c/lb. Rainy weather in Centre South Brazil over the next 15 days will delay the start of the 2011/12 crop, as favourable harvesting conditions are expected only from mid-April. While this will have an additional tightening effect on the domestic ethanol market, prices of which are soaring, the global sugar market should be able to cope with the delay. Higher availability from Thailand, which is now expecting a crop of around 8mt, as well as the much anticipated announcement this week of 500,000t of sugar exports from India, should provide adequate cover in the interim period. India's mills, which are struggling to pay cane growers, are desperate to take advantage of favourable export margins, and we expect another 500kt to be announced next month.

Coffee : NY futures have eased to 270c/lb alongside news that many roasters are raising prices to consumers and a seasonal build in stocks now that we are moving to summer time lower demand. While the recent price surge helped mobilise some origin selling from Brazil and Central America, the sharp Arabica deficit (which will only get worse due to a poor mitaca Colombian crop and Brazil's off cycle) will keep supporting prices. London Robusta prices rose sharply last week to $2,600/t due to lack of Vietnamese sales and reports of a large trade house controlling European stocks.

Cotton : Traders are positioning themselves ahead of next week's USDA planting intentions and stocks reports. Open interest in cotton futures is at lows last seen in July 2010, but mill demand remains very robust, with prices back up to 206c/lb. While we expect a good acreage response, weather and yields are always a risk. Although cotton is considered one of the most drought tolerant crops to plant, rains will be needed in late April, early May to achieve peak bloom and yields on dry land acreage.

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