April 26, 2012

 

US old-crop corn prices down 'too early' on upbeat harvest forecasts

As it warned that investors may be gloomy over new crop soy too, Goldman Sachs said that prices of old-crop corn, which dipped again on Wednesday (Apr 25), may have fallen "too early" under upbeat harvest expectations.

 

The bank restated a forecast of corn prices standing at US$6.90 a bushel in three months' time, well above the US$6.01 a bushel at which Chicago's July contract fell to on Wednesday (Apr 25), warning that investors may be underplaying the potential for setbacks ahead of harvest.

 

The July contract has fallen nearly US$0.60 a bushel from early-April highs under pressure from a speedy pace of spring sowings, which has raised expectations for this year's crop setting a record by a margin.

 

Furthermore, the early development of US winter wheat, some two weeks ahead of normal, has also increased ideas of an early wheat harvest, allowing livestock feeders a source of fresh grain just as corn supplies are running dry.

 

However, Goldman analysts said: "While we believe that early planting and average US weather conditions will indeed diminish the tightness of the US corn balance, the break in prices is likely too early.

 

"Summer weather remains key to this supply response. We continue to expect that old-crop corn prices will likely rebound on evidence of Chinese import demand and resilient corn grind for ethanol."

 

Indeed, the comments come amid continued rumours over Chinese purchases of US corn in recent days, which many traders believe has been far higher than the 600,000 tonnes signalled by US farm officials this week.

 

Broker US Commodities said, "Chinese demand rumours continue to swirl. Rumours have China purchasing up to 500,000 tonnes of old corn and 1.5 million tonnes of new corn."

 

Meanwhile, in soy, it is new crop which is being undervalued, said Goldman, which forecasts Chicago prices being at US$14.30 a bushel even in a year's time, US$0.90 a bushel higher than futures are pricing in.

 

Prices of new crop contracts have been "lagging, and left offering only slightly higher profit margins to US farmers than corn prices", despite the need for a strong crop to meet resilient Chinese demand, following weak South American harvests.

 

"Soy prices will need to incentivise larger US acreage" than the 73.9 million acres farmers have planned, down 1.1 million acres on year, according to a key USDA report on March 30.

 

November soy will "as a result trade at a higher premium" to prices of new crop December corn.

 

Goldman's comments follow an assessment from Macquarie on Monday that prices of old crop corn contracts "will still see support, as demand is required to be rationed".

 

"Old crop corn prices and basis need to work harder than they are currently doing to further ration demand," Macquarie said.

 

But both banks foresee an eventual sharp drop in corn prices for contracts from the 2012 harvest, with Goldman pegging futures for new crop contracts at US$5.25 a bushel, and Macquarie forecasting a dip in prices below US$5 a bushel from the fourth quarter of 2012 onwards.

 

Earlier seeding should meant that the "critical pollination period will be earlier than normal", in early rather than mid July, lowering the chances of damage from extreme heat, as occurred last year.

 

In fact weather models predict that July and August are "likely to be drier and hotter than normal", Macquarie said, quoting projections from MDA.