March 21, 2007

 

Morgan Stanley sees corn price retreat, barring drought in 2007

 

 

Corn prices are poised to fall and the food-for-fuel debate will simmer down in the 2007/08 marketing year, according to a research report from Morgan Stanley and Company released late Monday (Mar 19).

 

Morgan Stanley expects the price of corn will revert to a new mean range of US$3.00-3.50 a bushel once the market is convinced that, barring a significant drought during the current crop year, there will be both ample supply of corn in 2007/08 with a sufficient carryover to next year's crop, the report said.

 

Morgan Stanley analyst Hussein Allidina said in the report that "corn prices have likely moved too high too fast". Prices have rallied over 50 percent since August 2006 and this is expected to result in increased corn planted area this season. US yields could average 154 bushels per acre, pushing corn to a record 12.5 billion bushels, barring unfavourable weather. However, should yields disappoint, prices could average US$4.20 a bushel or higher, he said.

 

Biotechnology improvements are expected to be dramatic and ongoing, making corn yields a key driver of prices as higher yields from current acreage will be significantly more powerful than achieving the maximum possible increase in planted acres, the report said.

 

Morgan Stanley said the USDA--using linear progression--projects corn yields of 163 bushels an acre by 2012. However, based on research by Morgan Stanley, the firm suggests yields of about 168 bushels an acre are possible by 2010, 180 bushels by 2012 and about 195 by 2015.

 

"If both improvement and greater implementation of biotechnology are considered, this potential 30-bushel increase from 2006 yields to potential 2012 yields is the equivalent of adding approximately 20 million acres of corn, or 7 billion gallons of ethanol," the report said.

 

"Investors should begin to entertain the notion that there could be too much corn harvested during the 2007/08 marketing year," Vincent Andrews, another analyst at Morgan Stanley, said in the report. He said the firm based these assumptions on yield per acre--not planted acres, biotechnology driving yields above trend line, increased triple-stack acreage, ethanol being made from above-average corn, and that more corn will be grown outside of the US.

 

During 2005, 48 percent of the corn crop, or 39.2 million acres, was composed of non-biotech corn seed and only 9 percent of the crop, or 7.4 million acres, contained yield-improving stacked traits. During the 2006 crop year, 39 percent of the crop, or 30.5 million acres, was composed of non-biotech corn seed and 15 percent of the crop, or 11.7 million acres, contained yield-improving stacked traits. Morgan Stanley expects the trend toward the increased use of biotechnology will accelerate.

 

Other countries are likely to plant more corn in 2007 in an effort take advantage of improved revenue streams, according to the report.

 

Despite expectations that corn used in the production of ethanol will increase by over 50 percent year on year in the 2007/08 marketing year, Morgan Stanley estimates record corn production will modestly increase inventories to 864 million bushels, increasing the stock-to-use ratio to 6.5 percent.

 

Meanwhile, higher feed grain prices will limit feed demand as feedlots increase wheat and distillers dried grains quantities in feed rations, with cow-calf operators leaving cattle on pasture for longer periods of time, Allidina said in the report.