Speculative positioning should accelerate upside pressure for prices over the coming months. Speculators have deserted grains in recent months and the short-side trade has become very crowded. In particular, both wheat and soybean positioning is at record lows, while corn positioning has also declined considerably in recent weeks. The previous instance when speculators were as bearish towards grain prices was at the end
of 2013. Following political tension in the Black Sea Region, grain prices increased by 25% by May 2014, despite limited disruption to supply, as speculators rapidly unwound short positions. Given that we already expect the grain market to tighten over the coming quarters, a reversal in negative speculative sentiment will accelerate an increase in prices over that time.
Potential For A Big Move Higher
Select Grains - Net Long Speculative Positions
Sources: BMI, Bloomberg
Key Downside Risk: Government Policy In Russia And Argentina
There are two key issues related to government policy in Russia and Argentina that lead to downside risks to our above-consensus price forecasts over the coming months. First, the Russian government has recently reduced its wheat export tax, which could lead to a better supplied global market. Russia initiated the tax in the wake of spiralling inflation at the end of 2014 (see 'Black Sea Region: Higher Exports From H215' March 19), but has since reduced the tax as inflation pressures have receded.
Record Stocks Pose Price Threat
Argentina - Soybean Ending Stocks ('000 tonnes)
Source: BMI, USDA
In Argentina, the downside price risks stem from considerable farmer hoarding, which has left domestic soybean stocks at record highs. Argentine farmers have refused to sell soybeans in recent months owing to anger over higher export taxes as well as a depreciating Argentine peso (see 'Global Soybean Outlook:
Argentina Focus, November 12). However, with an election coming in Argentina in October, an eventual stabilisation of the peso may encourage farmers to release their stocks, which would push down soybean prices and ultimately other grain prices.
Upstream Analysis
Americas GM Outlook
BMI View: We continue to expect only moderate growth in genetically modified (GM) planting in the Americas over the coming years. Lower grain prices and fiscal issues in Latin America (particularly Argentina) will weigh on GM sales growth. Companies will maintain their focus on value-added products and new, innovative GM products, such as sugar and wheat.
The Americas region has experienced the fastest growth in genetically modified (GM) seed plantings in the last decade. The region now accounts for about 85% of global GM plantings, with the majority in the US, Brazil and Argentina. In 2013, these countries were the top three growers of genetically modified organism (GMO) plants in terms of field area. In the 2000s, Brazil saw the highest growth rate, as the area the country dedicated to GM crops expanded by 400% between 2004 and 2010. In Argentina and the US, the area dedicated to GM crops increased 41.4% and 40.3% respectively over the same period. In 2013 in the US, 93% of soybean acreage was devoted to GM plantings and 90% for both cotton and corn. The most common GMO seeds are herbicide-tolerant (HT) varieties, as insect-resistant (BT) strains have been, until recently, only available for corn.
Americas Dominating GM Crops
Global - GM Area Planted By Country In 2013 (% of global GM area planted)
Source: ISAAA
Lower Farm Incomes Will Depress Sales
Lower farm incomes across the Americas, relative to the last several years, will limit GMO sales growth in 2015. While we forecast grain prices to average higher in 2015 from current levels, corn and soybean prices will be considerably lower over the next three years compared to the 2011-2013 period. Lower average grain prices will combine with lower growth in farmland values and reduced government subsidies in the US, which will ultimately lead to a less cash-rich and higher-levered average farmer (see 'Farm Incomes:
Lower For Several Years', July 10). Indeed, the USDA expects total US net farm income to decline by 32%
between 2014 and 2015. Ultimately, lower farm incomes will negatively impact sales of GMO crops, which are more expensive than non-GMO varieties.
Farmers Hurt In 2015
United States - Annual Farm Net Income Growth (%)
Sources: BMI, Bloomberg, USDA
GMO sales growth will face particular headwinds in Latin America, as economic problems persist in the region's major growing countries of Argentina and Brazil. Our Country Risk team expects both Brazil and Argentina to enter recession in 2015, with each country posting real GDP contraction of 0.5% in 2015. BMI forecasts both countries' currencies to remain weak against the US dollar over this time frame, which will help keep a lid on international grains prices and will ultimately increase the cost of agricultural inputs for farmers in Latin America, as many inputs and components of inputs such as machinery are imported from the US. Lower farm incomes and persistent economic problems in the region increase the black market for GMO seeds and add further downside risks to the already lacklustre outlook for agricultural inputs growth in Argentina.
Seed Companies Will Struggle Over 2015
We believe that seed companies - such as Monsanto and DuPont Pioneer - will struggle to meet their top- and bottom-line guidance over 2015. We believe that Monsanto's earnings estimates for 2015 and beyond are too optimistic given our outlook for the industry (see 'Global Company Strategy - Monsanto
Incorporated', April 24). While the company is holding its guidance for full-year earnings per share (EPS) at USD5.75-6.00 for FY15, Monsanto has recently argued that earnings are likely to come at the lower end of this range. We see strong potential for the firm to further revise down this guidance.
Optimistic Estimates
Monsanto - Required Sales To Meet Gross Profit Target (USDmn)
CAGR = compound annual growth rate. Sources: BMI, Bloomberg
Emblematic of this dynamic, DuPont Pioneer posted big y-o-y declines in both revenue and earnings for its agricultural business in Q115. Revenue declined by 10.3% y-o-y, to USD3.9bn, while earnings fell 18.6%
y-o-y to USD1.2bn. DuPont attributed the large decline in revenue to tighter farm finances, while earnings fell due to the large-scale switch from corn to soybean. BMI expects the area devoted to corn to fall y-o-y in the US in 2015/16, while soybean acreage will increase. Per acre, soybean seeds cost about 40% less than corn, meaning that a big turn towards soybean will reduce profitability for seed makers.
More broadly, we expect soybean acreage and soybean production in the Americas to outpace that of corn over the next five years, which will limit seed makers' profits. On the 2013/14 level, we forecast corn output in Argentina, Brazil and the US to rise by only 4.1% to 477.2mn tonnes by 2018/19, while soybean
production will increase by just 6.6% to 247.6mn tonnes. We also expect lower grains production growth in
the Americas over the next five years relative to previous years, which will weigh on potential revenue growth for agricultural input companies operating in the region.
Global Growth Underperformance
Select Grains - Average Production Growth Between 2010-2014 and 2015-19 (%)
Note: 2015-2019 is BMI forecast. Each column measures average production growth over that time. The Argentina historical growth rates is partly due to base effects after the 2009 drought; Sources: USDA, IBGE, Conab, BMI
Innovation To Drive Growth
Major seed companies will continue to drive the growth of GMO plantings in the Americas. According to the USDA, field tests in 2013 were high by historic standards, with Monsanto leading the way by a wide margin. We believe that innovation by GMO companies - mainly Monsanto - will drive GMO sales in the coming years, targeting BT seed varieties. Monsanto is also trying to boost profits by upgrading single-stack products to multi-stack product mixes, which would be priced at a premium. Monsanto and Dow will also offer insect-resistant soybeans in South America for the first time from 2015. For Monsanto, approval was given by South American authorities in June 2014 and commercial use is expected to start in FY2015. The seeds from Dow are awaiting approval and the company expects availability within three-to-five years.
Stacked Varieties Offer Greater Value
US - % Of GM Corn Planted By Trait
Source: USDA
In terms of future developments, the increased use of crop information (part of the trend towards so-called 'Big Data') is a key innovation in the sector. Agricultural companies have been exploring data provision for years, in order to give farmers the latest news on the weather, price outlooks and crop management techniques. The practice has been expanded in Africa in recent years through mobile technology, but now farmers in North America are being targeted with a wider stream of data services. For example, DuPont recently launched its Pioneer Field360 services to help with water and seed selection, as well as a field level weather service in 2012. Monsanto has gone one step further, paying almost USD1bn in cash for Climate Corp to help advance its Integrated Farming Systems Platform.
Another future avenue for biotech growth will be in sugar cane. Brazil recently sequenced a sugar cane genome with the intent of developing cane that is insect resistant. The country has also been developing biotech sugar cane in Argentina, which some sources suggest could be approved for commercial use by 2017. Argentina is generally a net exporter of sugar, but production fell considerably in 2013/14 due to frost damage. Local sources indicate that there is potential to significantly expand the area dedicated to sugar in the country over the coming years. GM sugarcane is not yet available for commercial use, though roundup
ready sugarcane is currently in the development phase (two of four) within Monsanto. Monsanto aims to protect sugarcane in Latin America against pests such as the sugarcane borer.
Americas Fertiliser Outlook
BMI View: While fertiliser demand growth will slow in the Americas compared to the previous decade, the region - particularly Latin America - will post some of the strongest growth globally. Fertiliser companies in the continent will post strong profit margins over the next several months as gas prices have
fallen significantly.
North America is the world's largest regional producer and exporter of fertilisers and the second largest consumer after Asia. Fertiliser use is dominated by large agricultural producers such as the US and Brazil, while Mexico and Argentina use only a fraction of the total regional output.
Regional Variation
Select Countries - Fertiliser Consumption (kg/ha, LHS) & Fertiliser Production Balance (tonnes nutrients)
Source: BMI, FAO, World Bank
Subdued Fertiliser Prices Over H215
Fertiliser prices will remain subdued over the rest of 2015, as we expect demand for general usage to weaken, and for NPK (nitrogen, phosphate, potash) supply to generally be good over the coming months.
Grain plantings will weaken on a y-o-y basis in the 2015/16 season, as low grain prices (relative to the last five years) will discourage area planted growth, and a decline in farmers' incomes across the Americas region will limit the ability for many to use agricultural inputs (see 'Grains: May WASDE Release
Highlights Bullish Price Outlook', May 20). Furthermore, poor fiscal conditions and weak exchange rates in major producers Brazil and Argentina will further hamper fertiliser application.
Fertiliser supply will remain strong over the year, and we do not envisage any bottlenecks in production.
Output of potash will be high in 2015 and shipments will be similar to the record seen in 2014. Potash inventories are currently quite low in the US which will encourage trade of the commodity. Nitrogen supply will remain strong over the coming months, as low (y-o-y) oil and gas prices make margins particularly attractive for producers of the fertiliser. Nitrogen-based fertilisers' utility as more versatile fertilisers than either potash or phosphate will also encourage consumption. Phosphate will be well supplied on a global scale as shipments from Africa will be high over the coming months. OCP Group, the world's largest producing phosphate company, expects to ship a record amount of fertiliser in FY15, having exported a record 4.8mn tonnes in FY14.
Phosphate Prices Strongest
Select Fertiliser Prices - Rebased
Note: 5/1/2015=100. Nitrogen, potash and phosphate prices are Green Market US Golf NOLA Ammonium Nitrate, Green Market US Cornbelt Granular Potash, and Green Market North Africa Phosphoric Rock respectively. Source: Bloomberg, Green Market, BMI
PotashCorp Under Pressure From Competitors
While we hold a positive long-term view on the operations of PotashCorp (see 'Global Company Strategy - Potash Corporation of Saskatchewan Inc.', May 6), European supply of potash and the strategies of Belaruskali and Uralkali will pressure the Canadian company. In the short to medium term, Belaruskali will continue to undercut other potash suppliers on the global market in order to maximise exports. Belarus' exports to major trade partner Russia have significantly declined over the past year, as a result of the appreciation of the Belarussian ruble against the Russian rouble, as well as a general collapse in demand from Russia. As trade to Russia comprises about 40% of Belarus' GDP, one bright spot Belarus' economy is potash exports. The country is therefore keen to maximise potash export volumes and establish strong links with global potash importers, which it is able to do so via the state-owned Belaruskali. For instance, in March the company not only signed a contract to sell potash to China well below initial expectations, but was the first potash firm to finalise a contract for prices for the year ahead, the first time it has done so.
Little Asian Exposure For Canpotex
Canpotex Companies - 2012 Revenues By Region (As % Of Total)
Source: Bloomberg, BMI
Strongest Demand Growth In Potash
Over the next several years, we expect the Americas to post particularly strong demand growth in potash fertiliser. This is largely due to our forecast that soybean production in the US, Brazil and Argentina will increase at a much faster rate than corn output over the next five years. On the 2013/14, we forecast combined soybean output in the US, Brazil and Argentina to grow by 12.8% to 2018/19, to reach 261.8mn tonnes. Contrastingly, corn production over the same period will rise by just 4.1%, to 477.2mn tonnes. A higher area devoted to soybean will benefit the consumption of potash, as soybeans use more than twice the amount of potash fertiliser compared to corn over the growing season.
Potash Usage To Rise
2013 US Fertiliser Use By Crop (%)
Source: USDA
Lower Regional Crop Production Growth
We believe that fertiliser demand growth in the Americas will moderate over the next five years compared to the last decade. This is based on our view that grain production growth in the region will slow over our forecast period, compared to the previous five years. Indeed, we see comparatively limited additional growth potential for plantings due to lower average grain prices compared to the last few years. Brazil has the most potential to expand the area dedicated to crops, but that expansion would most likely involve increasing the area dedicated to crops in the Amazon rainforest, which would face considerable environmental opposition.
Production Growth To Slow
Select Grains - Cumulative Production Growth (%)
Note: 5 years to 2014 is cumulative % difference between average of 2008/09-2010/11 and 2013/14. 5 years to 2018 is cumulative % difference between average of 2012/13-2014/15 and 2017/18. Sources: USDA, BMI
Fertiliser demand growth will also be limited compared to the previous five years as the prices of NPK (nitrogen, potassium, potash) fertilisers remain high relative to crop prices (see 'Subdued Fertiliser Demand Over 2015', December 29 2014). Grain prices have averaged lower y-o-y since 2012 and we expect prices to remain low out to 2019 relative to the last few years. Currency depreciation in countries such as Brazil and Argentina will also curb the usage of agricultural inputs over the next year, as many inputs such as fertiliser are priced in US dollar terms and are imported.
Downstream Analysis
Food
Food Consumption
The spiralling cost of consumer goods has
eliminated many of the benefits of former president Hugo Chávez's wealth-redistribution programmes and is reflected in our forecasts for consumption. In US dollar terms total food consumption is forecast to decrease by a compound annual growth rate of 9.8%
from 2014 to 2019, per capita food consumption will show a CAGR decrease of 16.1%.
Food Consumption
(2010-2019)
Food consumption VEFbn (LHS) Food consumption, VEF, % y-o-y (RHS)
2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f
0 50 100 150
12 14 16 18
10
f = BMI forecast. Source: National sources, BMI
Table: Food Consumption Indicators - Historical Data & Forecasts (Venezuela 2012-2019)
2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Food consumption VEFbn 63.3 71.2 79.8 89.4 100.1 112.1 125.5 140.6
Food consumption, VEF, % y-o-y 12.5 12.5 12.0 12.0 12.0 12.0 12.0 12.0
Food consumption, VEF per capita 2,113.8 2,342.8 2,585.9 2,855.4 3,154.1 3,485.3 3,852.6 4,260.1
Food consumption, USDbn 14.7 11.7 12.7 5.7 4.0 4.5 5.0 5.6
Food consumption, USD per capita 492.2 385.6 411.0 182.5 126.2 139.4 154.1 170.4
f = BMI forecast. National Sources/BMI
Confectionery
In 2012, 53% of the overall market was accounted for by chocolate confectionery, followed by sugar confectionery and gum with market shares of 40%
and 7% respectively.
A young population and busier lifestyles have led to growing demand for on-the-go snacks, but
Venezuelan consumers have been forced over recent years to adapt consumption patterns to cope with rising prices and limited product availability.
For many consumers, confectionery has thus returned to being a luxury product, with product availability through the government-subsidised Mercal network being limited at best, as it is
intended to provide discount food staples for the impoverished.
Confectionery
(2010-2019)
Confectionery sales, tonnes (LHS) Confectionery sales, tonnes, % y-o-y (RHS)
2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f
0 100,000 200,000 300,000
0
-2.5 2.5 5 7.5
f = BMI forecast. Source: National Sources/BMI
Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2012-2019)
2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Confectionery sales,
tonnes 276,425.0 278,767.5 274,035.7 271,717.1 271,717.1 274,012.5 278,185.5 284,085.7 Confectionery sales,
VEFmn 4,087.59 5,955.96 9,474.76 14,874.36 21,189.31 27,770.08 34,384.65 41,684.69 Confectionery sales,
VEF per capita 136.5 195.9 307.1 475.3 667.8 863.5 1,055.2 1,263.0
Confectionery sales,
USDmn 951.8 980.3 1,505.8 950.7 847.6 1,110.8 1,375.4 1,667.4
Chocolate sales,
tonnes 145,664.7 145,973.6 144,194.6 141,860.3 141,652.7 142,639.9 144,599.6 147,449.4 Chocolate sales, kg
per capita 4.9 4.8 4.7 4.5 4.5 4.4 4.4 4.5
Chocolate sales,
VEFmn 2,472.9 3,585.3 5,725.3 8,933.1 12,711.1 16,639.6 20,579.2 24,919.4 Chocolate sales,
USDmn 575.79 590.10 909.92 570.95 508.44 665.58 823.17 996.78
Sugar confectionery
sales, tonnes 111,410.6 113,280.1 110,658.6 110,836.5 111,044.2 112,191.7 114,112.9 116,750.3 Sugar confectionery
sales, kg per capita 3.7 3.7 3.6 3.5 3.5 3.5 3.5 3.5
Gum sales, tonnes 19,349.7 19,513.7 19,182.5 19,020.2 19,020.2 19,180.9 19,473.0 19,886.0 Gum sales, kg per
capita 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6
Gum sales, VEFmn 398.88 581.99 924.86 1,454.38 2,072.50 2,717.01 3,365.23 4,080.97 Gum sales, VEF per
capita 13.3 19.1 30.0 46.5 65.3 84.5 103.3 123.7
Gum sales, USDmn 92.88 95.79 146.99 92.96 82.90 108.68 134.61 163.24
f = BMI forecast. Source: National sources, BMI
Drink
Alcoholic Drinks
Venezuela has the highest per capita beer consumption rate in Latin America, and between 2005 and 2010 consumption in volume terms increased by 7%. However, BMI is forecasting that government measures to reduce consumption, combined with the country's weak economic growth, will take their toll over our forecast period. We expect that beer volumes will grow by a compound annual growth rate (CAGR) of 0.2% between 2014 and 2019.
Venezuela is also a big consumer of spirits, with whiskey particularly popular. The country was recently the fifth biggest market for Scotch-whisky in the world but the impact of soaring inflation and government currency controls saw sales plummet by 34% y-o-y in 2013, with little prospect of a prompt
reversal of fortunes. Whilst rum sales have increased to fill the gap to some extent, demand across the spirits sector is likely to decline. Sales of spirits were strong in the years leading up to the downturn, owing to a boost in the price of oil which allowed the government to continue funding its welfare programmes. In turn, this allowed low-income consumers to increase their expenditure. However, owing to the current economic conditions and the government's desire to reduce alcohol consumption in Venezuela through measures such as a new consumption tax, such growth is unlikely to be repeated soon.
BMI is therefore forecasting that volume sales of spirits will decline by a CAGR of 0.2% over the period between 2014 and 2019 and that consumption of imported luxury spirits will be hit particularly hard.
Alcoholic Drinks
(2012-2019)
Alcoholic drink sales, VEFmn (LHS) Alcoholic drink sales, VEF, % y-o-y (RHS)
2012 2013 2014 2015f 2016f 2017f 2018f 2019f
0 50,000 100,000 150,000
20 40 60
0 80
f = BMI forecast. Source: National sources, BMI