Morgan Stanley placed corn at the top of its list commodity bets – forecasting high prices will drive US exports to a 14-year low – despite being among more upbeat forecasters of the US yield and foreseeing a 10% jump in Brazilian output.
The investment bank, in a report entitled The path forward for corn: higher, put the grain ahead of aluminium, copper and gold among its most bullish recommendations for investors in raw materials, citing the damage to the US crop – the world's biggest – from a hot and dry summer.
Even though Morgan Stanley was, with a US corn yield estimate of 149.5 bushels per acre, marginally more optimistic than the average forecast, of 149.1 bushels per acre according to a Dow Jones poll, the bank said that the squeeze on supplies warranted higher prices.
"Tight US supply will require continued demand rationing to keep the stocks-to-use ratio above 5%," the bank said.
The stocks-to-use ratio is a much-watched measure of the availability of a commodity, and therefore of its pricing potential.
"Prices need to continue moving higher to accomplish this rationing."
The comments come ahead of the US Department of Agriculture's latest monthly Wasde crop briefing, on Monday, which is expected to cut the official estimate for the domestic corn harvest.
US exports were likely to take the brunt of the squeeze, with Morgan Stanley forecasting shipments falling "materially" to 1.53bn bushels in 2011-12, their lowest since 1997-98.
"We see export demand as likely to be the first demand line item to suffer from high US prices," the report said.
"While early-season sales of 2011-12 corn were strong, the pace of those sales has slowed in recent weeks and forward sales have fallen roughly 36m bushels, or 9%, behind the pace set in the last marketing year."
Rationing of US demand looked harder to accomplish given positive margins from making corn-based ethanol, both on a spot basis and along the futures curve, and a reluctance by cattle farmers to reduce a domestic herd already at a 50-year low.
"On a gross profit basis, feedlots are still making an average of $34 a head of cattle on our estimates, certainly not enough to prompt a wholesale herd liquidation.
"At the same time, poor pasture conditions in the US South West continue to push calves onto feedlots, further bolstering feed demand."
The bank, which forecast corn futures averaging $7.25 a bushel in the newly-started marketing year, up from $6.50 a bushel in 2010-11, factored into its analysis a lower estimate than the USDA for the number of acres that that will make it to harvest.
With preliminary official data last month indicating higher-than-expected insurance claims by farmers, the bank pegged harvested area at 83.7m acres, 700,000 acres lower than the USDA guess.
Morgan Stanley's overall harvest estimate, of 12.509bn bushels, was in line with the market average.
However, it also factored in a jump of 10%, or 209m-bushel (5.3m-tonne) jump in production in the harvest in Brazil, the third-ranked corn producer, after the US and China. The USDA foresees a 2.0m-tonne rise, to 57.0m tonnes.
"All told, this increase in production could allow for an incremental 157.5m bushels in South American exports, partially offsetting the needed rationing in US exports.
"However, US prices need to move higher to increase the attractiveness of exports from other origins," the bank added, noting that Brazilian corn is trading at a premium of $0.26 a bushel to US corn.