Mixed rally ahead for commodities: Report

The coordinated upswing in agricultural commodity prices is coming to an end. While grains and oilseed prices will remain buoyant during 2007, beverage prices will slip back for the first time since 2001.

The year 2007 is forecast to bring a mixed bag for commodities sector, in which prices of grains and oilseeds are set to remain buoyant while those of agricultural commodities will decline, according to the Economist Intelligence Unit report.

The report said beverage prices will slip back in the year under consideration for the first time since 2001. In 2007, the fortunes of different markets will start to vary.

Further price increases in the grain and oilseed markets will be offset by price decline in sugar and beverages market and the overall FFB index will show no change in 2007, the report said.

The key wheat and maize markets are becoming tighter following poor crop output in Australia and other large producing countries. Buoyed by strong demand and low stocks, the grain index will see a further (albeit nominal) increase in 2007, followed by a stronger 5 per cent rise in 2008.

The report said the oilseeds market is witnessing a turning point. The middle of 2006 proved to be the trough for the market, with prices now beginning to rise, as stocks stop climbing. Large investments in biodiesel capacity and strong demand for feed and food use have absorbed the stock overhang, while weather conditions have resulted in smaller crops.

These trends will manifest themselves even stronger next year. The higher price environment will trigger a large supply response thereafter and in 2008 prices will stabilise.

The tea and the coffee markets are all running into surpluses and, as stocks build up, this will be reflected in a decline in prices of around 5 per cent in both 2007 and 2008.

After the spectacular rise of sugar prices this year, there will be a small correction in 2007. Prices have already weakened recently on the back of softer energy prices (which influence ethanol demand), and a sell-off in the futures market.

As the market slowly moves out of deficit (but not necessarily into a full surplus), prices will drop by 10 per cent in 2007, followed by a modest upturn in 2008.

The supply of both arabicas and robustas will be running ahead of demand for the foreseeable future, but not excessively. The Economist Intelligence Unit does not foresee a significant decline in prices of coffee over the next few months.

Wheat will be in short supply in 2006-07 after disappointing harvests, but high prices will encourage a recovery in output in 2007. Maize usage is overtaking supply, and an exceptionally big US crop will be needed in 2007 to meet domestic and export demand.

Indonesia's unexpected purchases have helped to lift rice prices, but world demand and supply will remain in balance. Barley supply, particularly of malting qualities, will be tight in 2006-07, easing slightly in 2007-08, the report said.

The vegetable oils market is in transition from the oversupplied market of 2005-06 to one where significant reductions in both oils and oilseeds stocks are expected.

Steadily increasing prices are likely during 2006-07 unless prospects for southern hemisphere crops deteriorate markedly or plantings of northern hemisphere crops decline (should farmers switch to more lucrative grain crops).

While demand for vegetable oils for biodiesel grabs the headlines, the underlying demand for the much larger food market remains robust.

Sugar prices are falling, but competition for cane from the ethanol sector (not only in Brazil) and recent less attractive sugar export prices may slow the expansion in supply at a time when the market needs to provide an extra 3 million tonne of sugar for consumption each year, the report said.

The current forecast for tea is more or less for a "steady as she goes" scenario, but with the bias towards lower prices "" unless weather conditions deteriorate. After a modest deficit this year, modest surpluses in 2007-08 will keep the market subdued.