September 20, 2010

 

Tight US corn market to support prices

 

 

Corn prices are likely to remain firm as further tightening of the supply and demand balance is expected on higher corn use for feed and ethanol production, according to analysts.

 

"We expect further tightening of the corn balances on our expectation for strong demand growth from ethanol and wheat-to-corn feed substitution as well as our view that US yields will come in below recent trend levels," Goldman Sachs said in a research report published Friday (Sep 17).

 

Goldman also said it continued to favour long positions in corn and that the price risk was skewed to the upside.

 

"Despite the recent rally, we believe that current corn prices still provide an opportunity for consumers to layer in upside protection," it said.

 

The bank also raised its three-month corn price forecast to US$4.65/bushel from US$4.15/bushel.

 

Barclays also said it believed the USDA has overestimated the corn crop yields in its latest report.

 

"The state of US yields has been likely still overstated by the USDA, with the market factoring in a number below 162.5 bushels/acre," Barclays said in a research report published Thursday (Sep 16).

 

The USDA reduced corn yields by 2.5 bushels/acre to 162.5 bushels/acre for the 2010-11 marketing season in its September report.

 

Barclays added in a report published Friday that corn was a "key beneficiary" of the rally in wheat - which was caused by a severe drought in Russia and lower Black Sea region - as corn can be used as a substitute for wheat in feed markets.

 

Strong Chinese demand for corn was also seen as supportive. ".Corn imports by the world's second largest producer-consumer China and the potential for further imports has provided a strong demand backdrop," Barclays said.

 

Concept Capital added in its Agribusiness bulletin published Thursday that it believed corn was the linchpin to keeping prices for agricultural commodities elevated.

 

"US corn dominates the world market, so it is eye-opening that after a record harvest in 2009 and another record out-turn likely this year, US stocks are expected to slide to about 8% of use going into the 2011 harvest from 10% now," Concept Capital said.

It also said that despite corn ending stocks not being "precarious," a record-plus crop would be required next year to keep prices from pushing higher.
 

"It is equally clear that the capacity to make up for a harvest shortfall from carryover stocks will be minimal," Concept Capital added.