July 14, 2011
 

Goldman retains forecast of decreasing US grain prices

 

 

Goldman Sachs did not alter earlier forecasts of falling US grain prices by the autumn despite low official estimates of US inventories, warning of overestimated expectations for ethanol plants' appetite for corn.

 

The investment bank acknowledged that the USDA's below-consensus estimates unveiled on Tuesday (Jul 12) for domestic corn and wheat stocks at the close of 2011-12 "could push prices higher in the near term".

 

Corn futures soared 3% in Chicago in the last session, and wheat prices 5%, before stabilising in early deals on Wednesday (Jul 13).

 

"We see prices as currently supported by lingering uncertainty on old-crop inventory levels as well as new-crop production," the bank said.

 

"Near term, we expect that this uncertainty will continue to be reflected in elevated price volatility and a higher risk premium that will support prices above our forecast."

 

However, Goldman retained a forecast that prices of corn will fall below US$6 a bushel in three months' time, implying losses of more than 10% compared with the expectations being priced in on futures market.

 

"Assuming average weather conditions materialise in coming months, we continue to expect lower crop prices this fall," the bank said.

 

Corn prices were most vulnerable, and set to resume their traditional discount against wheat in Chicago by the end of the year, with the bank sceptical over the upgrade to corn use by ethanol plants, which meant more of the grain going to make ethanol rather than livestock feed for the first time.

 

"While the USDA invokes strong ethanol producer margins, we believe that ethanol penetration in the US is close to the blend wall," at which production reaches the maximum levels that can be blended into gasoline.

 

There remains "little room for demand and production growth" until E15, a 15% blend of ethanol with gasoline, "can be commercialised", the bank added.

 

Soy retained the best prices prospects, with Goldman's forecasts implying values in line with the current futures curve, rather than well below, as for corn and wheat.

 

"While corn prices may outperform soy prices in the near term, as the USDA's US soy inventory forecast came in line with expectations versus a below-consensus corn inventory forecast, we expect that soy prices will outperform corn prices over the next 12 months," said the bank.

 

"We see soy as likely to remain in a deficit in 2011-12 on strong demand and acreage loss to corn and cotton."