Grains rally to weaken earlier than thought - Rabo

Rabobank shortened its forecast for the duration of the grains rally, slashing expectations for futures values heading into summer next year, and cautioning that corn price highs for 2012-13 may already have been set.

The bank concurred with the thinking of many peers, including Barclays Capital on Monday, that grain prices will revive from current levels, flagging "fundamental tightness" in wheat supplies and forecasting world corn stocks closing 2012-13 at the equivalent of 12.7% of use.

Besides being well below the much-watched US Department of Agriculture estimate, the figure would be "the second lowest world stocks-to-use on record, slightly above the 1973-74 levels of 11.8% when corn prices reached $15.30 a bushel, inflation adjusted".

Corn prices during the current rally peaked in August at $8.43 a bushel.

Price forecasts slashed

However, Rabobank made deep cuts to forecasts for grain prices in the first half of 2013, particularly for the April-to-June quarter, in which it cut its forecast for Chicago wheat prices by $1.70 a bushel to $7.50 a bushel, a forecast well below the futures curve.

Rabobank corn price forecasts and (change on last forecast)

Q3 2012: $7.85 a bushel, (-$0.05)

Q4 2012: $7.75 a bushel, (-$0.25)

Q1 2013: $7.50 a bushel, (-$0.60)

Q2 2013: $7.00 a bushel, (-$1.20)

Estimates for quarter-average price, front Chicago contract

Chicago's July wheat contract, which will be the spot lot for most of the quarter, was trading at $8.65 a bushel on Tuesday.

For corn, the forecast for Chicago prices in the second quarter of 2013 was downgraded by $1.20 a bushel to $7.00 a bushel.

That was also below the level investors are pricing in, with Chicago's July contract trading at $7.39 a bushel.

'Prices to ease materially'

The reductions reflected dynamics in corn, for which "fundamentals in the US will likely remain tight for the duration of the season", but for which prices face a downward drag from South American producers such as Argentina and Brazil.

Rabobank wheat price forecasts and (change on last forecast)

Q3 2012: $8.70 a bushel, (+$0.10)

Q4 2012: $8.90 a bushel, (+$0.10)

Q1 2013: $8.75 a bushel, (-$0.25)

Q2 2013: $7.50 a bushel, (-$1.70)

Estimates for quarter-average price, front Chicago contract

"Prices are expected to start easing materially in the second quarter of 2013 as the impact of harvest pressure emanating from South America and the expectations of new crop US production begin to weigh on the market," the bank said.

"While dependent on seasonal conditions, an expected increase of 5.6% in South American planted area is expected to boost production.

"Further bullish news seems necessary to encourage prices to reach fresh highs."

'Unprecedented demand rationing'

The forecasts align corn and wheat with the drop Rabobank had already forecast for soybean prices over the first half of 2013, with Chicago's front contract forecast to average $14.50 a bushel in the quarter, below the level futures prices are factoring in.

Again, this reflected expectations of the impact of South American harvests hitting the market early next year, although until then "unprecedented demand rationing must continue, which will keep prices high".

Indeed, for the last three months of 2012, the bank foresaw prices averaging $16.50 a bushel, a higher level than futures suggest, and despite estimating the US crop at 2.72bn bushels, a little above the USDA figure.

"End-user demand will remain strong below $17 a bushel, an keep prices supported for the remainder of 2012," Rabobank said.

Palm prospects

Elsewhere in the oilseeds complex, the bank joined commentators forecasting a recovery in palm oil prices from the two-year low reached on Monday, although a revival will become more evident in 2013 when "an increased reliance on palm oil [will] emerge as soybean stocks are drawn down".

For now, "palm oil price direction may continue to prove bearish due to high stock levels, seasonally large production and bearish macro factors".

Rabobank also trimmed forecasts for New York raw sugar, "on reduced concerns about the new season surplus and a bearish demand outlook".

"An abundant supply of sugar and increasing expectations of growing supply in the new season is the main reason we anticipate low upside price risk."

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