Corn futures better bet than soybeans, says SocGen

Corn represents a better bet than soybeans, Societe Generale, forecasting a return above $5 a bushel thanks to threats to South American sowings, in a briefing which recommended live cattle futures over lean hog futures too.

The bank highlighted the threat to US production of both crops from Midwest dryness, saying that "production prospects for US corn and soybeans are not nearly as robust as previously expected.

"While there is still time for favourable weather to aid the final weeks of crop development, it appears to us that the replenishment will not be as great as expected," SocGen analyst Christopher Narayanan said.

And both crops too faced a threat from temperatures which in central Brazil have been "very dry and warm", boding ill for the row crop sowings that producers are beginning.

'Risk to global inventories'

However, corn faced the extra threat in southern Brazil from frosts which, besides damaging wheat, "can potentially delay or shift corn plantings", Mr Narayanan said.

SocGen estimates for corn futures, and (change on previous forecast)

Q3 2013: $5.12 a bushel, (+$0.27 a bushel)

Q4 2013: $5.28 a bushel, (+$0.28 a bushel)

Q1 2014: $5.49 a bushel, (+$0.29 a bushel)

Q2 2014: $5.60 a bushel, (n/a)

Price for quarter average, Chicago spot contract

Indeed, with soybeans typically planted a little later than corn, this could provide an extra reason, besides relatively high soybean prices, to encourage a switch among southern Brazilian farmers to sowing the oilseed.

Furthermore, in central Brazil, if soybean sowings are delayed by dryness, that could, in implying a late harvest in early 2014, reduce the scope for planting a follow-on safrinha corn crop, which has come to account for roughly one-half of national output.

"Farmers often prefer to plant as early as possible in order to be able to later plant the safrinha corn crop to beat the next dry season," Mr Narayanan said, adding that "there continues to be risk to global inventories going forward that is worth monitoring".

'Ethanol margins attractive'

While SocGen raised its estimate for both crops, by up to $0.62 a bushel, its forecast for soybean futures remained below the futures curve.

SocGen estimates for soy futures, and (change on previous forecast)

Q3 2013: $13.41 a bushel, (+$0.62 a bushel)

Q4 2013: $12.37 a bushel, (+$0.57 a bushel)

Q1 2014: $12.45 a bushel, (+$0.58 a bushel)

Q2 2014: $12.68 a bushel, (n/a)

Price for quarter average, Chicago spot contract

For corn, the bank forecast prices averaging $5.12 in the last three months of 2013, rising back to $5.60 a bushel in a year's time, well above levels that futures are pricing in.

"We expect the May corn price to rally outright and to outperform the March soybean price over coming months," Mr Narayanan said, recommending a trade of a long bet in March corn against a short position in May soybean futures.

The positive comments on corn, while contrary to much market thinking, tally with ideas from Morgan Stanley, which has also recommended corn against soybeans.

Indeed, in a report on Monday, Morgan Stanley rated corn as its most bullish commodity bet, saying that price weakness "has left ethanol margins attractive, suggesting upside to ethanol production", besides flagging the risk to US yields from hot and dry weather in the late summer.

Hogs vs cattle

SocGen separately also recommended a short bet in Chicago lean hog futures, against a long bet in live cattle, despite flagging the boost to pork demand from relatively low prices compared with beef.

SocGen estimates for hog futures, and (change on previous forecast)

Q3 2013: 79.70 cents a pound, (+3.80 cents a pound)

Q4 2013: 77.50 cents a pound, (-6.10 cents a pound)

Q1 2014: 78.50 cents a pound, (unchanged)

Q2 2014: 79.70 cents a pound, (n/a)

Price for quarter average, Chicago spot contract

The forecast reflected an idea of an imminent switch by feedlots, which have been purchasing largely heavy cattle in a bid to lower grain needs in the face of high feed costs, to taking in lighter weight animals.

"The introduction of lightweight calves should also allow them to keep near full capacity longer, mitigating the need to constantly source new calves on the cash markets as seen in recent months," Mr Narayanan said.

In extending rearing time, this will limit output of fattened cattle, and switch tightness now seen in the market for feeder cattle those ready to be placed on feedlots to the live cattle market.

'Good selling opportunity'

While cutting its forecast for live cattle futures roughly to levels being priced in by futures, SocGen's estimates for lean hog futures remain well below the levels investors have factored in.

SocGen estimates for live cattle futures, and (change on previous forecast)

Q3 2013: 125 cents a pound, (-6 cents a pound)

Q4 2013: 126 cents a pound, (-6 cents a pound)

Q1 2014: 126 cents a pound, (-8 cents a pound)

Q2 2014: 131 cents a pound, (n/a)

Price for quarter average, Chicago spot contract

"We continue to expect pork prices to decline into the new year as lower grain prices encourage higher rates of production," Mr Narayanan said,

"We consider the recent rally in lean hog prices to be a good selling opportunity."

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