Corn, soy among 2013's best bets - Morgan Stanley
By - Published 06/12/2012

Corn and soybeans represent among the best bets in the commodities complex for 2013, and sugar among the worst, Morgan Stanley said, taking a "bearish" position on feeder cattle prices too.

The investment bank - while cutting its forecast for soybean prices after US yields fell less than had been expected - said that oilseed was nonetheless still placed for gains thanks to the need to replenish "precariously tight" inventories.

Its new price forecast, of an average of $15.70 a bushel over 2012-13, is comfortably above the futures curve.

"Strong global demand growth for soy products in 2013, and increasing risks to South America's 2012-13 soybean production, increase the urgency of adding US, Brazilian and Argentine acreage in 2013-14," Morgan Stanley said.

'Prices need to rise'

However, such extra sowings would come at a cost, with rising labour, fertilizer and transport costs raising the price needed to incentivise South American soybean expansion to nearly $14.50 a bushel for 2013-14.

"Soybean prices need to rise in order to gain this acreage," Morgan Stanley said.

Indeed, the need for extra acres put the oilseed "in the driver's seat next year", and would see US sowings in the spring rise to a record 79.0m acres.

'Production risks building'

US acreage expansion for corn in 2013-14 - which some commentators, including Goldman Sachs and Informa Economics see rising to a 77-year high next year will actually be a "harder sell", Morgan Stanley said, foreseeing sowing static at 96.9m acres.

Morgan Stanley forecast for US corn 2013-14 and (year-on-year change)

Sowings: 96.9m acres, (unchanged)

Yield: 155.0 bushels per acre, (+27%)

Production: 13.763bn bushels, (+28%)

Feed use: 4.82bn bushels, (+16.0%)

Fuel: 5.04bn bushels, (+11.9%)

Exports: 1.45bn bushels, (+26%)

Year-end stocks: 1.64bn bushels, (+153%)

Comparison with USDA estimates 2012-13

This forecast reflected the view that prices of soybeans, the grain's major competitor in spring crop area, "should rise to prevent inventories from dropping" further, as well as by caution among farmers who are finding poor yields from successive corn crops planted on the same fields.

Nonetheless, corn prices too "need to rise materially in early 2013 to incentivise further demand rationing from the US livestock sector", with weather already a worry for forthcoming crops too.

In the US, soil moisture levels "remain alarmingly low in the western Corn Belt", the bank said, cautioning that if dryness persists "it would leave the 2013 crop vulnerable to any summer dryness and heat".

For the South American crop due for harvest early next year, "production risks are building", give an Argentine sowing pace a month behind schedule and, in Brazil, the risk to follow-on, second corn crops from a delayed soybean planting season.

'Bearish on feeder cattle prices'

However, the prospect of higher corn and soybean prices bodes ill for prices of feeder cattle - animals ready to be fattened - in stemming the appetite from feedlots, which look set to suffer negative margins "through most of the spring of 2013", to stock up.

Morgan Stanley forecast, US soy 2013-14 and (year-on-year change)

Sowings: 79.0m acres, (+2.3%)

Yield: 43.6 bushels per acre, (+10.9%)

Production: 3.376bn bushels, (+13.6%)

Crush: 1.760bn bushels, (+12.8%)

Exports: 1.50bn bushels, (+11.8%)

Year-end stocks: 151m bushels, (+7.9%)

Comparison with USDA estimates 2012-13

"High corn prices should reduce placement demand," leaving supplies of feeder cattle "to back-up".Meanwhile, the poor condition of drought-hit US pasture of which 21% was rated officially in "good" or "excellent" health as of the end of October, down from 31% a year before in what was itself a difficult period "many encourage liquidation of the feeder herd in early 2013".

"We are bearish on feeder cattle prices in 2013," Morgan Stanley said, forecasting an average price of 144 cents a pound, below Chicago futures, if being a little more upbeat on prices of live, or finished, cattle given the squeeze in supplies that will come from lower feedlot uptake of animals for fattening.

The bank also said that it was "bullish" on hog prices, which looked set to recover later in 2013 once the impact of a slaughter spree prompted by high grain costs fed through into a squeeze on pig supplies.

China imports to slow

The bank was downbeat on sugar too, forecasting a global production surplus of 5.4m tonnes in 2012-13, a third successive season of output exceeding demand, fuelled by rising Brazilian volumes, and a strong Chinese crop which looks set to limit the need for imports.

"Chinese import demand is finally seen slowing in 2013, after a record year in 2012, on high stocks and better production," Morgan Stanley said, noting that imports in October had, for the first time in eight months, not shown a year-on-year rise.

"As the country enters its 2012-13 crushing season with full stockpiles, and a likely bumper crop, seen 8.2% larger year on year, even relatively healthy demand growth of 4% should be satisfied with domestic production."

The bank forecast sugar prices averaging 19 cents a pound over 2012-13.

'Wheat needs to underperform corn'

On wheat, Morgan Stanley said it that while there were risks to crops ahead, such as dryness in some northern hemisphere winter wheat areas, these had been "mostly priced in".

It was "too early to write off US winter wheat yields", despite the crop entering dormancy in its worst condition on record.

"History shows rainfall and temperature during the spring growing season are the main determinants of final yields, and we will continue to use a trend yield estimate for wheat until the spring."

Furthermore, for now, US supplies from the latest harvest were "more than adequate" to offset disappointing results in some other producing countries, such as Australia and Russia.

"Wheat needs to underperform corn to stay priced into the global feed ration," Morgan Stanley said.

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