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Over the last six weeks, drought in the US, excessive rainfall across Europe and weak monsoon rains in India have contributed to significant cuts in agricultural supply forecasts.

Shifts in the jet streams (to a more northerly path across the US and a more southerly meander over Europe) have been a key driver of the poor conditions. However, if El Nino materialises towards the end of this year, as the NOAA and others expect, the jet stream should shift south again in the US and alleviate the drought. This will probably be too late to improve the harvest this year (which means prices remain high for now) but it sets the scene for higher yields and lower prices in 2013: we forecast average corn prices of USc700 bushel for H2 2012 but USc590 bushel for 2013.

Longer term, there are two reasons why soft commodity prices should maintain reasonably high average prices: (1) If scientists are correct, the impact of climate change (slowing the jet streams and dragging them closer towards the poles) suggests growing conditions in line with this year's experience could be a more regular occurrence, and (2) because this is key to incentivising emerging market farmers and governments to invest in their land and raise productivity.

From a market perspective, we highlight: (1) the risk to margins in expensive food producers [Unilever ( UL ), Danone rated Underperform]; (2) value in meat producers [Smithfield ( SFD ) rated Outperform]; (3) improvement in the terms of trade for soft commodity exporters and the long-term potential in Brazilian agriculture (SLC Agricola rated Outperform); (4) continued positive outlook for palm-oil (top picks/Outperforms: London Sumatra, Salim Ivomas, Sime Darby, Genting Plantations), and (5) an opportunity to take profits in fertilisers, particularly the Nitrogen plays.

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