Goldman Sachs raised its target for wheat prices above $10 a
bushel, thanks to a tumble in US inventories to multi-year lows, and forecast
recoveries in corn and soybeans to record highs.
The investment bank lifted its forecast for Chicago wheat
prices, on a three-month horizon, to $10.25 a bushel, after US Department of Agriculture
data on Friday showed US inventories of the grain far lower than the market had expected.
Indeed, the data, once already reported export and domestic
processing statistics are taken out, imply wheat feeding of 435m bushels during
the June-to-September period, "the highest level since at least the 1970s",
Goldman analyst Damien Courvalin said.
Use of wheat in feed has been boosted by elevated prices of
corn, sent to record highs by a drought-hit US harvest.
Wheat prices, while historically strong, have remained well
below record levels above $13 a bushel set in early 2008, as its stocks fell to
Inventories to slump
In fact, Goldman forecast US wheat inventories dropping in
2012-13 to their lowest since 2007-08, factoring in Friday's data and the prospect
of enhanced export demand following drought damage to the Russian harvest.
"Given the tightening of the global wheat balance, we expect
US wheat exports will be larger than currently expected by the USDA," Mr
Courvalin said, foreseeing inventories closing the season at 522m bushels, a
drop of nearly 30%, and well below the current official US number.
Goldman wheat price forecasts and (change on last)
Three-month horizon: $10.25 a bushel (+$0.45 a bushel)
Six months: $9.50 a bushel (+$0.75 a bushel)
12 months: $8.00 a bushel (+$0.25 a bushel)
And wheat futures were vulnerable to a spike if the trend of
disappointing harvests continues, Goldman said, amid concerns over rain damage
to the Argentine crop, and a drought hit to Australia's.
"Another wheat crop failure would likely push wheat prices
sharply higher and above corn prices to limit animal feed demand in the face of
inelastic human food use," he said.
"This in turn would likely shift wheat to being the leader
of the grain complex."
'Prices will need to
set new highs'
The bank forecast higher corn prices ahead too following
Friday's data showing US inventories of the grain lower than forecast, and
stood by a forecast of $9.00-a-bushel corn on a three-month horizon.
"We reiterate our view that corn prices will need to set new
highs and trade well above the current forward curve," Mr Courvalin said,
noting that US feed demand "remained remarkably strong" over the summer.
Goldman corn price forecasts and (change on last)
Three-month horizon: $9.00 a bushel (unchanged)
Six months: $8.25 a bushel (unchanged)
12 months: $6.50 a bushel (-$1.00 a bushel)
"The underlying level of corn feed demand is even more
remarkable when taking into account the record high wheat feed demand implied
by Friday's low wheat stocks."
However, the bank cut its forecast for corn prices on a
12-month horizon to $6.50 a bushel, foreseeing a "significant supply response"
next year to the current high values, and also foreseeing some threat to the
market from a weak pace of US exports and worsened dynamics in ethanol.
Stable US ethanol inventories, despite a drop in production,
"suggests that exports have likely collapsed over the past few months, with imports
of Brazilian ethanol up strongly as well.
"Absent a pick-up in net exports, we believe that current
high ethanol inventories create downside risk to weekly ethanol production,"
and with it pressure on prices.
'Futures will recover'
Goldman also cut its forecast for soybean futures, flagging the
boost to ideas in US supplies from teh USDA's report on Friday, which also raised
the estimate for last year's domestic harvest.
With recent yields beating expectations too, "recent developments
point to a slightly less severe soybean deficit than previously expected", Mr Courvalin
Goldman soybean price forecasts and (change on last)
Three-month horizon: $18.75 a bushel (-$1.25)
Six months: $17.25 a bushel (-$0.75)
12 months: $13.50 a bushel (-$2.50 a bushel)
However, with Chinese demand remaining strong, "current
prices are not reflective of the tight soybean fundamentals, and we expect that
prices will recover in coming months with US soybean export sales and shipments
the key driver to this price rally".
While soybean futures "will likely underperform" corn in the
near-term, prices will still stand at $18.75 a bushel on a three-month horizon,
eclipsing by some $0.80 the current record price.