The world's corn market is poised to return to its tightest since the mid-1970s as demand from ethanol plants grows at a time when farmers are switching into soybeans, Goldman Sachs has said.
The investment bank flagged "material upside" for corn prices, which looked set to beat those Chicago futures are already factoring in.
The improvement would be helped by rises of 14% in 2009-10, and 9.3% the year after, in demand for US corn by ethanol plants.
"Importantly, support ethanol economics - as ethanol markets have moved solidly into positive territory – reinforce this dynamic and suggest risk to this fuel-related corn demand forecast is skewed to the upside," Goldman said.
Meanwhile, plantings of corn in the US, the world's biggest grower, would rise by 3% for the 2010 harvest. Production may decline assuming average growing conditions rather than the benign ones witnessed in recent years.
The squeeze would leave inventories of US corn at 10.4% for 2010-11, down from the 14.9% implied for the end of 2009-10 by Washington forecasts.
On a global level, Goldman said it expected the ratio to fall to a 12.8%, the lowest for at least 36 years, as South American farmers switched from corn to cash in on high-priced soybeans.
The bank forecast prices rises to an average of $5 a bushel for 2011, with potential for higher gains if energy prices rise.
"Our forecasts for higher oil prices prices in 2010 and particularly 2011 present risk that corn price appreciation may be even larger and faster than these corn price forecasts suggest," Goldman said.
The bank forecast some scope for rises in soybean prices, which would hit $12 a bushel in 2011, helped by strong growth in demand from emerging markets, which have raised consumption by an average of 8% a year over the past decade.
"We expect inventories will continue to climb marginally, assuming normal growing weather," Goldman said.
"However… we expect rising energy prices will increase the value of soybean oil, contribute to higher costs of production, and be necessary to motivate soybean planting in the face of the strong corn prices we anticipate."
Wheat looked less likely to realise prices set by Chicago futures, despite a 6% drop in US plantings for the 2010 harvest.
"We do not view the implied wheat production decline as a driver for higher prices given expected high inventories heading into the 2010-11 crop year and few catalysts for stronger demand growth," Goldman said.
The exception was demand for feed, which should rebound "moderately as wheat regains competitiveness over corn".