Corn futures, which topped $8 a bushel for the first time, could yet spike above $10 a bushel, Morgan Stanley said, lifted by a "battle royal" between livestock producers for supplies.

The investment bank hiked average 2012-13 forecasts for both Chicago corn futures, to $7.85 a bushel, and soybean futures, to $16.00 a bushel, citing the "need to ration demand" after heat and drought cut estimates for US yields.

However, given the "inelastic nature of demand" for the crops - meaning higher values may only choke off a small amount of consumption - and the prospect of "record tight" inventories prices could trade "significantly higher for short periods of time".

"Indeed, we anticipate periods of time in the coming months where corn trades in double-digits," Morgan Stanley said.

That forecast implies considerable further upside for futures.

Chicago's September contract on Thursday rose nearly 2% to a record, for a spot contract, of 8.16 ¾ a bushel, while the new crop December lot reached a contract high of $7.99 a bushel.

'Need for higher prices' 

Morgan Stanley based its forecasts on assumptions of the US corn yield falling to a 10-year low of 135 bushels per acre this year, below the US Department of Agriculture's estimate of 146.0 bushels per acre.

In production terms, the bank pegged the US corn harvest at 11.9bn bushels, nearly 1.1bn bushels below the current USDA estimate.

"The market is quickly coming to appreciate the need for higher prices to protect already-depleted corn and soybean inventories, in light of disappointing production globally — and especially in the US," the bank said.

The bank pegged the soybean yield at 40.0 bushels per acre, compared with a USDA estimate of 40.5 bushels per acre, implying 91m bushels less in output, while noting the potential for further downgrades.

"With US weather forecast to remain hot and dry through at least end-July and likely into August, the direction of yield estimates and production is likely lower still."

Producers vs blenders

The consumers set to suffer most from the shortfall in corn supplies were in fact not the ethanol producers, whose slowdown in output to its lowest for at least two years, amid a rash of plant closures, has prompted concern of government intervention to support the industry.

"Ethanol rationing will be more limited than market expects," the bank said, noting a return in Illinois ethanol production margins to positive territory, thanks to higher prices of the biofuel.

Furthermore, US ethanol stocks were declining, standing more than 3m barrels below a record high in March.

"As ethanol inventories continue to fall, producers will likely be able to take profit share from the blenders," which mix ethanol into gasoline, and "which still enjoy positive spot margins of at least $0.26 per gallon".

'Battle royal'

Instead, with ethanol demand "providing limited opportunity for rationing" corn use, the bank forecast a "battle royal" over the grain between US and international livestock industries.

The outcome would likely be corn exports falling to a 27-year low of 1.3bn bushels, while US feed demand "is likely to see significant rationing".

Among US livestock producers, the chicken industry was likely to feel the brunt of the pain, with its margins rendered "solidly negative" by soaring feed costs.

"With the chicken production cycle the shortest among the major livestock, we expect that this industry to be the first to reduce demand for feed," the bank said.

The cattle sector looked more resilient than the pork industry, with corn prices above $8.30 a bushel needed to turn feedlot margins negative over the rest of 2012.