Goldman, Merrill counter ag market gloom
By - Published 12/12/2012

Banks offered support to grain and oilseed bulls, despite the negative reaction to the latest US crop estimates, with Goldman Sachs saying it remained upbeat on prices, and Bank of America Merrill Lynch revealing it was "positive" on prospects for wheat futures.

Goldman Sachs - while acknowledging that a US Department of Agriculture upgrade on Tuesday to the estimate for domestic wheat stocks was "bearish" - said that "key uncertainties remain" in crop balance sheets.

These included the potential for a USDA downgrade to the rain-hit Argentine wheat harvest, which the department pegged at 11.5m tonnes, compared with some industry forecasts below 10m tonnes, with figures for corn production in Ukraine and the US also open to downgrades.

"The combination of downside risks to crop production and signs of resilient demand will require higher crop prices in coming months given already-very-low inventories, especially for corn," Goldman analyst Damian Courvalin said.

"The upside to soybean prices is potentially larger than for corn but would require further deterioration in South American weather."

Goldman Sachs last week recommended a long bet on corn futures, in a basket with crude oil, and with copper hedged against a short position in aluminium.

'Could be severely damaged'

Meanwhile, BofA Merrill Lynch, outlining forecasts for 2013, on Wednesday named wheat, with the likes of copper, gasoline and gold, among commodities on which it was "positive" on price prospects, cautioning investors to "prepare for disappointing wheat harvests in 2013".

"May to October was the driest six months in over 100 years in Kansas, Oklahoma and Nebraska," the bank said.

"Already 26% of US winter wheat is in poor to very poor condition in 18 key producing states,

"Unless US weather turns unusually favourable in winter and spring, next year's winter wheat crop could be severely damaged, likely providing support to prices."

'Some upside'

And while the USDA on Tuesday cut its hopes for US wheat exports in 2012-13, the reason behind an upgrade of 50m bushels to 754m bushels in the forecast for domestic stocks at the close of the season, BofA Merrill Lynch was upbeat on prospects for shipments.

"Russia now may have to import wheat to meet domestic demand," after potentially shipping more than its exportable surplus in an early-year trade spree.

Furthermore, "recent excessive rain in the southern hemisphere during the harvest season," in areas such as Western Australia and Argentina, "are offering support to wheat prices, and open the door to stronger demand for US exports going forward".

With global stocks in for a "substantial" drop over 2012-13, "with the most recent supply disruptions in the US and Australia potentially damaging the next harvest, wheat prices could have some upside in 2013".

The bank also said it saw "upside to corn prices in the first half of 2013", thanks to the low level of US inventories, while saying it was "less constructive" on the prospect for soybean futures, "given the likely rebound in South American soybean production".

Market prices

The comments contrast with the market reaction to the USDA's latest crop revisions, which has sent wheat prices sharply lower, with Chicago futures on Wednesday hitting a five-month low of $8.09 a bushel.

The March contract staged some recovery to $8.20 a bushel as of 08:15 local time (02:15 UK time), down 0.1% on the day.

March corn was also 0.1% lower, at $7.27 a bushel, with January soybeans down 0.5% at $14.64 a bushel.

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