October 18, 2010

 

US corn price to top US$6 per bushel

 

 

Corn prices are to remain above US$6 a bushel for at least the next year, nearing parity with wheat, given the likely reluctance of demand to adjust to weakened US supplies, Goldman Sachs has said.

 

The bank said that the prospect of a fresh round of looser monetary policy in the second round of quantitative easing, or so-called "QE2"- had improved prospects for the range of commodities, easing concerns of a dip back into recession, which would sap demand.

 

However, it kept corn among its top picks, following last week's cut by US officials to their estimates for the crop, which, Goldman Sachs forecast will be followed by further downgrades.

 

Chicago prices were set to average US$6.25 a bushel over three, six and 12-month horizons, significantly higher than the market is currently factoring in.

 

The forecasts are also not far short of the US$6.50 a bushel that Goldman forecast for wheat over the same time horizons.

 

Wheat prices were likely to remain curbed by relatively strong US supplies, if showing potential for volatility in the wake of corn price movements and as reports over prospects for winter sowings, especially in Russia, filter through.

 

For corn, Goldman Sachs, citing historical comparisons, has long held doubts over rosy forecasts for US yields this year. The market squeeze was also set to be enhanced by the likely reluctance of buyers to curb demand.

 

Ethanol plants, even at current corn prices, were enjoying "favourable" production and blending margins, while exports would be underpinned by the likelihood of weaker crops in South America, where the La Nina weather phenomenon may yet decrease production prospects further.

 

Livestock feed was the one area where consumption may decrease, with the bank forecasting less substitution of wheat with corn than had it previously expected.

 

Goldman said that it expected corn's stocks-to-use ratio-a key measure of supply tightness, and therefore the prices that commodities can command to end 2010-11 is at 6.1%, even lower than the 6.8% implied by USDA figures, which is itself a historically low figure.

 

On a global basis, the stocks-to-use ratio would crop to 14.9%, below the USDA's 15.9% estimate.

 

The bank added that it was "marginally bearish" over soybean prices in the short-term, while adding that over the long-term the oilseed "offers the most compelling drivers" thanks to demand from emerging markets.