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Wheat 50% overvalued - corn to hit three-year low

Wheat futures for next year's crop are overvalued by nearly 50%, and corn prices are on their way to their lowest since 2010, Macquarie said, pegging soybeans as the best bet of Chicago's big three crops for 2013.

The bank said that while it was "generally bullish" for grain and oilseed prices in a three-to-six month outlook, thanks to the supply squeeze caused by 2012 production setbacks, "a large surplus is coming to market" later next year, weighing on values.

The surplus "will be a general pressure on prices as the world's consumers will have plentiful competition for their demand", Macquarie said.

The "trigger point" for the fall in prices "will be the outlook for the pollination window in the early summer", which was disrupted in the US particularly this year by hot and dry weather.

"If this [pollination] goes well, bearishness will likely ensue."

'Still time for recovery'

Macquarie forecast Chicago wheat futures averaging $6.00 a bushel in the last quarter of 2013, a level last seen in a spot contract six months ago.

It is also well below the $8.86 a bushel that December 2013 futures are factoring in.

While dry conditions in southern Russia and the US "do provide a level of risk" to yields of winter wheat, already in the ground, "there is time for a recovery", assuming revived moisture levels, Macquarie analyst Chris Gadd said.

'Awash with corn'

Wheat also faces pressure from corn futures set to drop to $4.50 a bushel by the October-to-December quarter next year, also some 30% below the futures curve, and representing a price not seen for a spot contract since September 2010.

Macquarie forecasts for US corn 2013-14 and (year-on-year change)

Sowings: 95.5m acres, (-0.9%)

Yield: 162.0 bushels per acre, (+33%)

Production: 14.350bn bushels, (+34%)

Feed use: 5.0bn bushels, (+21%)

Fuel: 5.20bn bushels, (+15.6%)

Exports: 1.37bn bushels, (+19.1%)

Year-end stocks: 1.98bn bushels, (+107%)

Comparison with USDA estimates 2012-13

Indeed, assuming a return from this year's drought-hit yield to a trend level forecast at 162.0 bushels per acre, "the US will be awash with corn" in 2013-14, achieving a harvest of close to 14.4bn bushels.

And production elsewhere could be strong too, with prices remaining elevated long enough to incentivise large sowings in Ukraine, which could see a crop of a record 25m-30m tonnes, and Brazil, where farmers are set for a second successive strong harvest of second, or "safrinha", corn.

Acreage of safrinha crop, planted as a follow-on in fields vacated by the soybean harvest, will hit a record 8.6m hectares, far in excess of the 6.8m hectares sown to main-crop corn.

'Relative outperformer'

Soybeans will prove a better bet, still on course for a decline in 2013, but one already largely factored in.

Macquarie forecast, US soybean 2013-14 and (year-on-year change)

Sowings: 79.1m acres, (+2.5%)

Yield: 43.8 bushels per acre, (+11.5%)

Production: 3.430bn bushels, (+15.4%)

Crush: 1.650bn bushels, (+5.8%)

Exports: 1.582bn bushels, (+17.6%)

Year-end stocks: 203m bushels, (+45%)

Comparison with USDA estimates 2012-13

The Macquarie forecast of Chicago soybeans average $12.50 a bushel in the fourth quarter of 2013 is some 6% below the level of November 2013 futures.

"Even though soybean area will increase in the US in the 2013-14 season, the delta in production is limited in comparison to corn," Mr Gadd said.

"We expect world soybean supplies to increase in the 2013-14 season," an increase which "will naturally allow prices to reduce from the historically high levels".

"We do, though, see soybeans as the relative outperformer of the complex, as the increase in supplies will be far smaller in comparison to the shift we expect in corn."

Macquarie's 2013 crop price forecasts are the latest in a series, from the likes of Commerzbank, Goldman Sachs and Morgan Stanley.

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