A "double kicker" of demand boosts for corn, and the potential for short-covering in wheat and upsets in the soybean market, will revive the rally in crop prices – but not quite yet, NZX ProFarmer Australia has said.

The crop consultancy group forecast that bumper harvests so far this year, and the prospect of more to come, would keep a lid on prices into 2010.

"Prices will languish around current levels," ProFarmer said in a monthly report.

However, the market will "turn higher", helped by growth in consumption of crops both by bioethanol plants, whose margins have moved "strongly into the black", and livestock farmers.

"This should provide a firm demand base for corn, which will assist wheat," the report said.

'New price paradigm' 

Wheat will also be supported by technical factors, given that the huge numbers of short positions speculators had taken out in the grain, which ProFarmer said was the highest it could remember, had not depressed prices.

"It means the traditional speculators themselves may not have the additional power to push the market lower and... will need to buy back these shorts, which will lift the market," the report said.

"We would expect a short-covering rally at some point."

While wheat stocks are high, farmers, who were "reasonably cashed up", may be reluctant to sell while prices were near the cost of production in many regions.

"We are of the belief that Chicago wheat prices are now trading a new price paradigm, although this has yet to be proven," ProFarmer said.

"If our thinking is correct, then Chicago wheat futures should not fall, for any significant period of time, below $4.50 a bushel and should rally again after putting in seasonal lows over the next month or so."

South America question 

Nonetheless, wheat may be overtaken by soybeans, for which credit and political headwinds represent potential threats to forecasts of a sharp rebound in South American crops to record levels.

"Production in the region has stagnated over the past few years," the report said.

"The big question mark in ProFarmer's mind is whether the production issues in South America are structural, political, financial or weather related."

While soybean plantings in the region would feel some pressure from the temptation for farmers' to grow highly-priced cotton or sugar instead, "underlying access to crop planting credit will be the biggest obstacle, along with the weather".

"We see soybeans as having the best chance of leading a grain market rally based on South America failing to reach lofty production."