Goldman Sachs cautioned over the potential for resilient US ethanol
production to support corn prices as it braced investors for a potential
revival on commodity values, considering a sell-off in the complex "overdone".
The investment bank said it was most bullish, in the
near-term, on Brent crude, which is sees being supported by low world petroleum
inventories, and copper, in which a decline in prices on concerns about China
has been "particularly excessive".
"Commodity markets declined sharply in February along with
emerging market equities due to renewed concerns over China, which we believe
is overdone," the bank said.
"The well-tested rule of thumb in commodity investing is do
not be short commodities into an accelerating economic environment and do not
be long commodities into a contracting economic environment, given the highly
cyclical nature of the asset class."
The bank shifted to "overweight" its forecast for commodity
prices in the short-term, raising its returns target to 6.0% from 2.0%, although
it retained a neutral rating on a 12-month basis, foreseeing returns of 3.0%.
For grains and soft commodities, returns look like being even
lower on a 12-month horizon – at a negative 4.0%, Goldman Sachs said, although
forecasting a positive 5.0% figure for livestock.
However, the bank cautioned that in ags "near-term risks
still remain to the upside, as markets remain just 'tolerably tight'.
"Upside risks to corn prices remain strongest," with ethanol
taking over from feed "as the "source of the next potential demand surprise".
The US Department of Agriculture, in its latest benchmark
Wasde report on Friday, raised by 100m bushels its forecast for domestic feed
use of corn.
'Very inelastic demand'
Goldman has been more upbeat than the USDA for much of this season
over the potential for US ethanol production, flagging the likelihood of lower
exports from Brazil, which is encouraging use of the biofuel through changes to
blending rates and taxation.
The US primarily uses corn as feedstock for making ethanol,
unlike Brazil where the biofuel is manufactured from sugar cane, although
American mills are said to be investigating mixing some wheat or sorghum into
the blend, given relatively low prices of the grains.
Rival investment bank Morgan Stanley also supported the idea
of resilient corn use in ethanol plants, saying that "we believe US domestic
ethanol demand remains very inelastic, with few alternatives available
economically in the near term".
US ethanol production was 805,000 barrels a day two weeks
ago, the latest data available, slowed from 906,000 barrels a day a year before
by high corn prices, but is expected by
many observers to increase in the next quarter as a period of strong US
gasoline use kicks in.