December 26, 2011

Corn looks set to return above US$7 a bushel by the second half of next year, boosted by supply shortfall and strong demand from all three major consumers - livestock feeders, ethanol plants and importers, according to Commerzbank.

Indeed, this will be enough to keep supplies tight even if the South American corn harvest escapes significant damage feared from this month's dry and hot spell, and if US plantings rise in 2012 to a 68-year high, as currently expected.

"Even if the corn acreage is being expanded, corn should remain in relatively short supply given the robust demand," Commerzbank said.

Corn prices will rise sufficient to regain a significant premium over wheat, averaging US$7.20 a bushel in the last quarter next year, implying gains of more than one-quarter for investors buying Chicago's December 2012 corn contract, it added.

Wheat, a substitute for corn in uses such as livestock feed, will continue to rely on corn for price support.

"At the moment, the view that a large harvest is also expected in 2012 is predominating," the bank said.

"Wheat is therefore unlikely to show any major price surges on its own," and even if being lifted by corn to US$7.00 a bushel in the last quarter of next year, holds out the prospect of only marginal gains for investors, who have already priced most of this in.

Indeed, soy, which is in relatively short supply, will be a better bet, with their prices supported by the need to encourage farmers to maintain sowings, the bank added.

"The greater focus on corn is likely to slow the expansion of areas under cultivation for soy in South America and should lead to a lower soy acreage in the US.

"All this should help shore up prices," Commerzbank said, forecasting Chicago soy averaging US$13.00 a bushel in the fourth quarter of 2012, some 10% above the level that futures are pricing in.