Goldman Sachs raised to "overweight" its recommendation to investors on commodities, saying the sell-off on fears for Chinese, eurozone and US economies "is likely overdone", creating "upside risk" for prices.

The commodities liquidation, which has driven prices of a host of raw materials from coffee to crude oil to multi-month lows this month, was "exceptionally extreme", Goldman said.

Commodities underperformed "all other assets", leaving their prices pushed "well below fundamental fair value and in some cases below sustainable cost structures".

However, Goldman forecast that policymakers "will be able to contract the European debt crisis" at the heart of the sell-off, while Chinese data over the weekend "confirmed a "stronger micro environment of robust Chinese commodity demand despite weaker headline macro data.

"Accordingly, we are moving back to a near-term overweight recommendation," the investment bank said, reversing a downgrade in March to a "neutral" rating.

'Excessive decline'

Goldman flagged in particular crude, oil, gas, copper, aluminium and gold, which it foresees recovering to $1,940 a troy ounce on a 12-month horizon, from less than $1,600 currently.

However, it urged agricultural commodity producers to "wait for a recovery in crop prices" before selling, following the slide in crop futures, while urging corn and soybean buyers to consider hedging against a revival in values.

"The decline in agriculture prices, especially corn and soybeans, has been excessive given the low level of inventories," the bank said.

"While fears over further escalation of the eurozone sovereign crisis may weigh on prices, we expect that the announced support to Spanish banks, the beginning of the US growing season as well as the key June 29 US Grain Stocks and Acreage reports will likely bring focus back on tight grain fundamentals."

'Skewed to the upside'

Indeed, the group restated that it still expected "higher old-crop corn prices", which were set for now to outperform wheat futures, depressed by the onset of supplies from the US winter wheat harvest.

Prices of Chicago's July corn contract "are low relative to the level of US inventories, especially given continued strong ethanol production and potential loss of wheat feeding".

Meanwhile, the risks for prices of new crop corn, which stand within 3% of the $5.25 a bushel that Goldman forecasts, are "skewed to the upside as dry US weather raises the risk that yields disappoint".

'Support to cattle prices'

For soybeans, the bank restated forecasts that Chicago futures in the oilseed will recover to $14.30 a bushel, near the price of the spot July contract, on six and 12-month horizons too, higher than the market is factoring in.

Chicago's November soybean contract stood at $13.35 a bushel at 06:15 local time

"Low soybean inventories require both higher old- and new-crop prices to limit demand growth," Goldman said.

And the bank stuck by expectations of Chicago prices of live cattle – animals ready for slaughter - recovering to 130 cents a pound in three months' time, boosted by firm demand for meat at a time of falling US feedlot inventories, which in April dropped year on year for the first time in two years.

"The decline in cattle supplies will be the key support to cattle prices."
 

agrimoney