Goldman cuts hopes for corn, soybean, wheat prices
By - Published 12/11/2012

Goldman Sachs, warning of "uncertainty" which could spark a bout of volatility in crop markets, remained upbeat on corn, soybean and wheat futures, even as it cut price forecasts.

The bank ditched expectations of Chicago corn prices returning to \$9 a bushel, on a quarter-average basis, and wheat rebounding to \$10 a bushel.

And it slashed by up to \$2.25 a bushel its forecast for soybean futures, saying that while "the US and global soybean markets remain in deficitů risks of critically tight soybean inventories continue to fade quickly".

The comments follow an upgrade on Friday by the US Department of Agriculture to its estimate for the domestic soybean harvest, pegging it at 2.97bn bushels, some 80m bushels higher than analysts had expected.

'Risks remain high

Nonetheless, Goldman's estimate for soybean prices on a three-month horizon was, at \$16.50 a bushel, higher than the \$14.14 a bushel that Chicago futures, for March, were factoring in on Monday.

Goldman Sachs forecasts for Chicago soybean futures and (change on last)

Three-month horizon: \$16.50 a bushel, (-\$2.25)

Six-month horizon: \$15.50 a bushel, (-\$1.75)

12-month horizon: \$13.50 a bushel, (no change)

This reflected in part a question mark over the US estimate, with Goldman analyst Damien Courvalin noting that the "very large" pod weights used by the USDA in its forecasts "remain surprising given the severity of the US drought" this summer, the worst since 1956.

However, Mr Courvalin also flagged the potential yet for weather to upset South American crops during the critical December-to-February window.

"While weather conditions have started to improve, we believe risks to expectations of record large production and very early harvest remain high," he said.

Indeed, sowing slowdowns caused by poor weather in South America suggest that "February exports could be limited" from the region, keeping demand for US shipments high in an early-2013 period which represents "the key to soybean prices".

"With the size of the US soybean crop now nearly final, we expect focus to then shift to the strong weekly US soybean export inspections and in turn push soybean prices higher."

Oil factor

Goldman's downgrade to corn and wheat price forecasts followed Wasde estimate changes which some brokers have viewed as mildly bearish, in raising numbers for the US corn harvest and global wheat supplies.

Goldman Sachs forecasts for Chicago corn futures and (change on last)

Three-month horizon: \$8.25 a bushel, (-\$0.75)

Six-month horizon: \$8.25 a bushel, (no change)

12-month horizon: \$13.50 a bushel, (no change)

However, Goldman, which foresees the USDA raising its estimate for corn acres lost to drought this year, and for Argentine wheat losses to excess rain, termed the Wasde "neutral".

Its downgrade reflected weaker forecasts for oil prices, a big determinant for values corn, of which some 40% of the US crop is used in making ethanol.

Corn prices are in turn a big influence on wheat prices, given that the two grains are interchangeable for some uses, notably in livestock feed.

'Wheat to become leader'

Corn prices will receive a boost ahead from "slowing" exports from South America, whose competitiveness has kept US shipments in check.

"Combined with our forecast for lower US production on a smaller harvested acreage, and barring a major surprise in the December 1 corn stocks level, we expect corn prices will move higher in early 2013," Mr Courvalin said.

Wheat, meanwhile, "increasingly needs to price itself out of feed demand in the face of inelastic human food demand.

"This in turn would likely shift wheat to being the leader of the grain complex," with Paris prices, in the face of limited European Union export supplies, looking likely to outperform Chicago ones and shift demand to the US.

'Currently mispriced'

The bank also flagged that the period of relatively low volatility in prices of all three crops of late looks set to end, as uncertainty, such as over South American prospects, in the face of weak inventories.

Goldman Sachs forecasts for Chicago wheat futures and (change on last)

Three-month horizon: \$9.50 a bushel, (-\$0.75)

Six-month horizon: \$9.50 a bushel, (no change)

12-month horizon: \$8.00 a bushel, (no change)

"Our fundamental outlook and projection for very low levels of inventories across all three major crops points to higher price volatility in coming months."

"The potential wide distribution of future crop prices is currently mispriced by the options market," which use volatility as part of its pricing mechanism,

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