JPM Agricultural Markets Outlook 2Q19Supply side constraints fuel agri commodity recoveryJune 2019Tracey Allen(44-20) 7134 6732tracey.l.allen@jpmorgan.comJ.P. Morgan Securities plcSee the end pages of this presentation for analyst certification and important disclosures.1Agricultural Markets Outlook – Tangible supply side constraints will continue to drive agri commodity prices off the lows Weather premiums returned to agricultural markets in 2Q19, prompting a vast improvement in performance which should be sustained in 2H19. Up 2% through 2Q19 to-date, the J.P. Morgan Agriculture Index is now leading the performance across the commodity complex this quarter. Unprecedented US planting delays drive concern for new crop supplies amid adverse conditions in other export regions, prompting widespread investor short covering and commercial re-positioning. Weather risks are not subsiding, El Niño appears to be intensifying and grain prices are not yet at levels which destroy demand. Despite the softer outlook for global growth, demand side headwinds have faded into the periphery somewhat. However, US trade disputes are undermining the market share of US agri exports, not only to China amid the unresolved trade war, but the potential for US tariffs on Mexico – the leading importer of US corn, also raises concern for additional retaliation and dislocations in US trade flows. Tangible supply side constraints across grain markets, and tightening fundamentals across the softs will continue to drive the agri commodity complex off the lows. We hold high conviction that these idiosyncratic factors which are tightening US and world agricultural fundamentals faster-than-anticipated will overshadow the bearish impact of a low growth / low inflation environment through 2H19.Trade recommendations: we stay long the agri index and long ICE #11 Sugar in anticipation of a continued improvement in performance through 2H19. 1Images: PixabayA G R I C U L T U R A L C O M M O D I T I E S Q U A R T E R L Y 2 Q 1 9Source: Bloomberg, J.P. Morgan Commodities Research, *as of close 6 June 2019Nearby contract price YOY and YTD change (%) Supply side constraints fuel agri commodity recovery2•The J.P. Morgan Agriculture Index has outperformed the broad commodity index through 2Q19, and appears to be recovering off multi-year lows. The rapid turnaround in performance mid-quarter has been led by a material grain supply shock, which we have long flagged and been positioned for (Agricultural Markets Outlook: Short covering risks ahead..., Allen, 22 March). •The timing of the supply led breakout and commencement of an uptrend in the BCOM Agriculture & Livestock Index has occurred at an interesting juncture of heightened risks for global growth, and unprecedented US export impediments. The deterioration in the macro outlook, coupled with record soybean availability and large Latam exportable corn supplies will likely weigh on the extent of upside price recovery through 3Q19. BUT further supply side disruptions would likely fuel a recovery in grain prices to levels not seen since 2012/13. •The intensification of the US - China trade war is now weighing more severely on the global growth outlook and acutely on business sentiment. We now expect China to maintain retaliatory tariffs on US imports well into 2020. While the possibility of a trade agreement before this point holds a low probability, it remains a significantly bullish albeit peripheral risk factor for agri markets.•Looking into 2H19, ICE #11 Sugar remains our most bullish call, and at 15 USc/lb, our 4Q19 forecast calls for a 23% rally from spot, as the world market transitions to a deficit balance.•Trade recommendations: we stay long the agri index and long ICE #11 Sugar in anticipation of a continued improvement in performance through 2H19. A G R I C U L T U R A L C O M M O D I T I E S Q U A R T E R L Y 2 Q 1 928.6%17.5%11.9%4.9%3.2%2.6%2.0%2.0%1.6%1.4%1.1%0.6%-0.5%-1.2%-1.9%-2.9%-2.9%-3.2%-5.4%-5.6%-5.9%-7.6%-12.0%-12.9%-20%-10%0%10%20%30%40%CME Lean HogsCME Class III MilkCBOT CornICE #11 Raw SugarICE #5 White SugarICE Arabica CoffeeJPMCCI Agri IndexMinneapolis WheatCBOT SoymealICE NY CocoaICE Cocoa LondonCBOT WheatCBOT Soybean OilBCOM Agri IndexMDE-Bursa Palm OilCBOT SoybeansEuronext MaizeICE #2 CottonICE Robusta CoffeeICE CanolaCME Feeer CattleCBOT Kansas WheatEuronext WheatCME Live Cattle2Q19YTD 2019Tangible supply side constraints will continue to drive agri commodity prices off the lowsSource: CBOT, ICE, Bloomberg, J.P. Morgan Commodities Research Note: All Forecasts are period averages.J.P. Morgan agri commodity price forecasts3•Looking into 2H19, tangible supply side constraints across grain markets, and tightening fundamentals across the softs will continue to drive agri commodity prices off the lows. We hold high conviction that the idiosyncratic factors which are tightening US and world agricultural fundamentals faster-than-anticipated will overshadow the bearish impact of a low...
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