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%.

'Upside risks'

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.