Morgan Stanley retained corn as its top bet among commodities
despite cutting price forecasts - as it did for soybean and wheat futures, which
it viewed on course to levels not seen since 2010.
The bank on Monday placed corn, with palladium, as its most
bullish bets in commodities – for now – despite a reduced forecast, of $4.60 a
bushel, of the average price for Chicago futures in 2013-14.
While below the previous forecast of $5.30 a bushel, this
remains above the value that futures are pricing in.
The forecast reflected an idea that "the market remains
overly optimistic on US production prospects, while continuing to underestimate
the potential for a rebound in US demand.
"We continue to favour corn in the near term, with soybeans
and wheat likely to feel additional pressure in the first half 2014."
Although many traders believe that the US Department of
Agriculture will next month upgrade its estimate for this year's domestic
harvest, following widespread trade talk of better-than-expected yields, Morgan
Stanley said that a late growing season may have hurt late results.
"We continue to see modest downside to the USDA's 2013-14
production estimates, on the expectation that yields could still disappoint in
the latest-harvested corn," the bank said, pegging the crop at 13.88bn bushels,
some 100m bushels below the official figure.
Meanwhile, lower prices are encouraging use by US livestock
feeders and by ethanol plants, besides by importers, who faced a "compelling
signal" from lower prices "to restock after drawing down on inventories in three
out of the last four years.
"We contend that the market remains complacent about US
export potential for 2013-14.
"Rallies in response to strong weekly export data have
generally been seen as selling opportunities. However, we expect that export
sales will become increasingly difficult to ignore."
Corn vs wheat
However, the bank was less upbeat over wheat prices, which
it saw averaging $6.50 a bushel this season, round about the current futures
curve, warning that values faced pressure from upgraded supply estimates and from
its premium to corn, which would discourage demand.
"Higher relative wheat prices and more plentiful corn supply
should pressure global wheat feed demand," Morgan Stanley said, forecasting a
drop to 18% of wheat's share of the world feed ration this season, down from
22% two years ago
production, falling corn prices should continue to provide additional
competition for global feed demand.
"Our 2013-14 price forecast envisions wheat prices returning
to 143% the price of corn, the highest wheat/corn ratio in four years."
'Doubts about sustainability'
Meanwhile, soybean prices will average $12.65 a bushel this
season, down $0.35 a bushel from the previous forecast, and below the futures
The bank, flagging "doubts about the sustainability" of a
strong start to 2013-14 for US soybean exports, cited the prospect of a strong harvest
in South America, which it expects to attract import orders to switch from the
Furthermore, a boost to US demand from a fast pace of soyoil
conversion to biodiesel by the domestic biofuels industry may fade, assuming a
tax perk to blenders is not renewed behonnd the end of this year.
"We caution that without a continuation of the blender's tax
credit, the pace of US biodiesel production could slow considerably in the
first half of 2014."
However, Morgan Stanley ditched its relatively bullish view
of even corn for 2014-15, forecasting pressure on prices from the need to
discourage the decent production prospects for the season which already look in
"Prices must find a new equilibrium that adequately grows
demand while discouraging additional global plantings in 2014-15."
Prices would in 2014-15 potentially fall "near Brazilian
breakevens, as excess global supply precludes the need to add acres in the new
For corn, the bank forecast corn prices average $4.20 a
bushel next season, below the level futures are pricing in, with soybean prices
pegged at $9.80 a bushel, a level not seen since July 2010 for a Chicago front
Wheat futures were seen averaging $5.50 a bushel, a level also
not seen since July 2010.