Wheat prices to top \$10 a bushel, says Goldman
By - Published 01/10/2012

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 multi-year lows.

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.

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)

"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.

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.

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)

"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.

"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.

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)

With recent yields beating expectations too, "recent developments point to a slightly less severe soybean deficit than previously expected", Mr Courvalin said.

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.

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