Ralf Oberbannscheidt (pictured), portfolio manager, DWS Invest Global Agribusiness believes commodities will remain under pressure due to increased demand for food and fuel…
Sentiment was weak in emerging markets as signs of decelerating demand appeared, a result of rising energy prices year-on-year. Supply chain disruptions associated with the Japanese earthquake have weighed on global production. In addition, German and French industrial production posted lower numbers in June. More positively, euro area sales and German factory orders rose.
Possibly more significant is the fiscal front across the euro and the rising uncertainty caused by tensions in Greece. The fear of contagion from Greece’s debt woes receded at the end of the month as a result of the Greek parliament’s approval of the government’s medium-term fiscal plan, removing some of the short-term uncertainty for policymakers and markets.
Brazil’s highlight this month was its inflation report. Overall, the central bank maintained the view that the inflationary outlook has tempered as a result of domestic growth moderation and lower commodity prices. Economists have suspected that Brazil’s agricultural sector played a critical role in the strengthening of GDP in the first months of 2011.
With agribusiness markets fundamentally still in a very tight supply/demand situation and good operational channel checks for sub industries such as fertilisers, food retailers, seed companies and croppers, we are looking for mispriced investment opportunities.
Looking at the deliverable front-month contract of corn, prices are still firm year-on-year, indicating that margins for farmers are still strong even with the recent weakness in soft commodities. The recent weakness in fertiliser stocks runs counter to this underlying fundamental driver.
The first-ever G20 farm ministers’ summit in Paris in June addressed the acceleration of change in agricultural commodity prices, passing an "action plan on volatility of food prices and global agriculture”.
In addition, the latest publication of the OECDFAO stated that global food prices are likely to remain high for the rest of this year and into 2012 due to dwindling stocks and only small production increases for the majority of crops. Highlighted in the report was the fact that the increased demand for food and fuel will keep the pressure on commodities, a trend which would be marked by fresh bouts of volatility that could hurt producers and consumers. But, the advantage of higher prices would be the catalyst to attract fresh investment to meet global demand. The overall long-term outlook seems cautiously optimistic.
The month of July could see a bounce in upstream exposed equities with utilisation rates improving further, pricing firming in fertilisers, crop protection and seeds. The one sub-sector currently being valued with regard to margin stability is food processing. The inflation pass-through we have seen to retail customers may be viewed as a luxury by producers going forward.
