January 16, 2012

 

 

Despite falling US corn and soy prices due to greater than estimated production, Goldman Sachs remained optimistic on prospects for corn and soy futures after cutting its prices forecasts.

 

The investment bank sounded a sour note for long-term corn prices, downgrading its estimate for futures in a year's time to US$5.25 a bushel, a level not seen since November 2010.

 

However, most of the bank's estimates for corn and soy, even after downgrades of up to US$0.55 a bushel, remained above levels the market is currently is factoring in.

 

"Following this [USDA] data release, we are raising our inventory forecasts and in turn lowering our crop price forecasts," Goldman said.

 

However, the estimates "remain above the current forward curves for both corn and soybeans".

 

The bank cited inventory estimates which remained "still low" despite the USDA revisions.

 

Indeed, the USDA in its key Wasde crop report on Thursday (Jan 12) trimmed its forecast for US corn stocks at the close of 2011-12, but by two million bushels, a fraction of the downgrade investors had expected.

 

Furthermore, the bank restated the threat from the dry weather in parts of South America, which has cut expectations, in particular, of Argentina's corn output.

 

"A recovery in South American precipitation in January and February would be required to push crop prices materially lower from current levels," Goldman said.

 

"In turn, we see upside risk to our forecasts should the La Nina weather conditions persist in South America as large cuts to local production would support US exports and crop prices, with soybeans likely to be most impacted."

 

Indeed, the bank retained forecasts that soy would, over the medium term, prove a better performer than corn, supported by renewed growth in Chinese imports and the prospect of losing out to the grain in the forthcoming US acreage battle.

 

"Even if weather conditions improve markedly in South America, we expect soybeans to outperform in 2012-13 on relative acreage loss to corn in the US next spring."

 

Wheat looked set to be the worst performer, with Goldman's forecasts for the grain's prices below what the market is factoring in especially on the 12-month horizon, where the bank foresees a price of US$5.75 a bushel, and Chicago investors see a price above $7 a bushel.

 

The return of wheat to its historic premium over corn "is likely to be deferred until at least next summer, and with disappointing supplies required to bring wheat prices back to trading above corn prices", the bank said.

 

"Although concerns for new-crop winter wheat production in Ukraine are rising, weather conditions in Russia and India have been reported to be very favourable to wheat."

 

"Further, today's US winter wheat seedings were well above expectations and last year's levels, pointing to potential strong US wheat production in 2012-13."

 

Other commentators have also cautioned that significantly higher corn prices look off the agenda for now following the USDA reports, which sent futures in the grain down the exchange limit in Chicago on Thursday (Jan 12).

 

At Country Futures, Darrell Holaday said the data had "taken US$7.00-a-bushel corn out of play through the spring," as well as US$13-a-bushel soy, with 2012 probably already having seen its highs until at least May.

 

"Near term, we feel March corn will test the US$5.85-5.90-a-bushel area," he added, while forecasting "some commercial and world demand to surface below US$6".

 

At Commonwealth Bank of Australia, Luke Mathews said that "the justification of US$7.00-7.50-a-bushel corn seems to have evaporated."

 

"But we wouldn't go so far as saying the USDA reports were outright bearish for corn values. After all US corn inventories were reduced slightly month-on-month and are forecast at their second tightest level in history."

 

At Texas A&M University, agricultural economist Mark Welch said that "nothing fundamentally changed in the corn market as a result of" the USDA data.

 

"We still have the tightest US corn supply situation since 1995-96, world supply levels are at record lows, corn use went up on a brighter export outlook, and corn in storage is less than last year and below the five-year average."