Global Commodities Research20 August 2020 Agricultural Markets QuarterlyDemand is in the driver's seat as weather risks loomGlobal Commodities ResearchTracey Allen(44-20) 7134-6732tracey.l.allen@jpmorgan.comJ.P. Morgan Securities plcRuhani Aggarwal(91-22) 6157 3576ruhani.aggarwal@jpmchase.comJ.P. Morgan India Private LimitedSee page 19 for analyst certification and important disclosures.www.jpmorganmarkets.com The agri commodity complex remains in a demand led recovery after the historic collapse of 2Q20, and emerging weather risks are bringing lofty supply side expectations back into focus. After collapsing to historical lows through April and again in June, the JP Morgan Agriculture & Livestock TR Index has continued to recover and is up 5% through 3Q20 to date, with room to retrace much of the -11% YTD loss (Figure 2). Non-Commercial investors have aggressively covered shorts across the softs and livestock in recent months, however grain markets remain seasonally short and vulnerable to covering. Our top picks for 2Q20 in ICE #11 Sugar and MDEB Palm Oil materialized in gains of 27% and 35% respectively since our May Quarterly installment. While we see scope for further upside price risk across these markets into year end and beyond, CBOT Corn appears best placed to drive the gains across the complex into year end. USD weakness is providing reprieve for some agri markets, namely CBOT Corn where relative export competitiveness is on the rise. However, concurrent BRL weakness may again become a headwind as Brazilian exports begin to flow. The extent of negative price momentum across grains and oilseeds declined QOQ - CBOT Corn (short term lookback) and CBOT Soybeans (long term signal) are prone to a positive switch. Price momentum across softs improved QOQ - ICE Coffee short term indicator signals profit taking. ICE Brent short term signal switched positive, with room to extend (Appendix). Trade recommendations: We remain constructive biofuel markets and grain market volatility, which is rising off historic lows. We stay long CBOT Corn Dec’20 370 call, long the ICE #11 Sugar October ’20 14.5 – 16 USc/lb call spread, short the 13.25 USc/lb put, stay long the agri complex via an index.Figure 2: The JP Morgan Agriculture & Livestock TR Index has continued to recover off historicApril lows, up 5% through 3Q20 to date, with room to recover much of the -11% YTD lossIndex performance from 2/1/2020Source: Bloomberg, J.P. Morgan Commodities Research, 18 August671011308985406080100120140Jan-20Feb-20Mar-20Apr-20May-20Jun-20Jul-20Aug-20EnergyIndustrial MetalsPrecious MetalsAgriculture & LivestockAggregateFigure 1: Agri commodity price movements – active contractSource: Bloomberg, J.P. Morgan Commodities Research, 18 August 20208.6%4.4%4.0%2.7%-1.2%-1.4%-1.8%-2.5%-3.0%-3.3%-3.9%-6.6%-7.5%-8.0%-8.4%-9.2%-9.4%-9.6%-9.6%-11.2%-11.5%-14.4%-15.7%-28.0%-40% -30% -20% -10%0%10% 20% 30%ICE Robusta CoffeeICE CanolaICE #5 White SugarCME Class III MilkCBOT SoymealCME Feeer CattleEuronext MaizeICE NY CocoaEuronext WheatCBOT SoybeansICE #11 Raw SugarJPMCCI Agri IndexMDE-Bursa Palm OilICE Arabica CoffeeCBOT Soybean OilCBOT WheatICE Cocoa LondonMinneapolis WheatICE #2 CottonBCOM Agri IndexCBOT Kansas WheatCME Live CattleCBOT CornCME Lean Hogs3Q20 TDYTD 20202 Tracey Allen(44-20) 7134-6732tracey.l.allen@jpmorgan.comRuhani Aggarwal(91-22) 6157 3576ruhani.aggarwal@jpmchase.comGlobal Commodities ResearchAgricultural Markets Quarterly20 August 2020Demand is in the driver's seat as weather risks loomThe agri commodity complex remains in a demand led recovery after the historic collapse of 2Q20, and emerging weather risks are bringing lofty supply side expectations back into focus. After collapsing to historical lows through April and again in June, the JP Morgan Agriculture & Livestock TR Index has continued to recover and is up 5% through 3Q20 to date, with room to retracemuch of the -11% YTD loss (Figure 2). From a fundamental point of view, our balances show acontraction in world 2020/21 stocks-to-use ratios of corn, soybeans, cotton and palm oil, while sugar and wheat stocks-to-use will likely plateau (Figure 4) (see World Commodity Balances and Agricultural Commodities Quarterly 2Q2020: Fundamentals chart pack). Positioning wise, Non-Commercial investors have aggressively coveredshorts across the softs and livestock in recent months, however grain markets remain seasonally short and vulnerable to covering (Figure 5).The outlook for synchronized yet disparate global growth paves an interesting path for the agri commodity complex through 2H20, after one of the most abrupt swings in global activity ever observed (see Global Data Watch, Kasman et al, 14 August). Global growth is projected to surge to 5.1% YOY, up from -4.2% through 2020, with much of the surge originating across emerging markets - notably Emerging Asia. China’s V shaped recovery and concurrent expansion in the hog herd has already had a marked impact on the recovery ...
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