Crop markets offer "little outright opportunity" for price gains, Goldman Sachs warned, lowering coffee market hopes, and warning over corn use by ethanol plants despite firm prospects for oil values.

The investment bank said that commodities overall "justify an overweight allocation" in investors' portfolios, even though gains since December had reduced the potential for further headway.

However, while commodities on average should offer a return of 12.0% over the next year, as measured by the S&P GSCI Enhanced Total Return index, crop investors should brace for a loss of 6.0%.

"We continue to see little outright opportunity in the agricultural space," Goldman Sachs said, a category from which it excludes livestock, for which it foresees 5.0% price gains in the next 12 months.

Contrasting view

The warning contrasts with an assessment by Standard Chartered on Wednesday that agricultural markets were exhibiting "bullish signs", after poor weather cut South American crop prospects, while better economic data spur demand growth.

"The broader macro outlook is modestly supportive, with US economic data releases for January generally positive and China showing initial signs of monetary easing, having reduced its bank reserve requirement over the weekend," StanChart analyst Abah Ofon said.

"This will be positive for the agricultural complex."

Price cautions

However, Goldman Sachs warned over weaker prospects for New York arabica coffee prices, flagging their decline last week to a 15-month low of 195.90 cents a pound "on expectations for record production from Brazil".

And in corn, it cautioned that the "pronounced disconnect" that had developed in recent weeks, when Chicago prices had stabilised despite US tighter fundamentals, did not make a rebound was on its way.

"Although low expected US corn inventories and a tight balance leave the corn market vulnerable to the upside, we believe that risk of a collapse in ethanol production and potential for early corn planting given dry weather in the US Midwest will likely cap corn upside in coming months."

The bank restated a forecast of Chicago's near-term corn contract falling $5.25 a bushel in 12 months' time, some $0.50 below the level futures are pricing in. 

Ethanol factor

The warning over ethanol represents a change of emphasis for the bank, which two weeks ago forecast a "further tightening of US corn ending stocks on higher corn grind for ethanol".

Morgan Stanley on Tuesday estimated ethanol plant margins at a negative $0.07 a gallon, while forecasting that the increase in the US mandate to 13.2bn gallons this year, and a discount to gasoline, "should continue to support demand" for the biofuel.

Latest weekly US ethanol data showed domestic inventories hitting a record 21.49m barrels.

'Oil price spike'

Ironically, Goldman warned that prices of oil itself were "extremely vulnerable to price spikes", noting low world inventories despite Libya returning to production, Saudi Arabica pumping at close to maximum capacity and a warm start to the northern hemisphere winter clipping demand.

The world is "in the largely unprecedented situation in which Opec spare capacity is at a trough rather than at a peak just as a world economic recovery is getting on a more solid footing", the bank said.