Goldman backs corn to regain premium over wheat

13th Jun 2012, by Agrimoney.com

Goldman Sachs called time on the slide in corn prices, saying values would return to a short-term premium against wheat, as brokers raised questions over US estimates which sent futures tumbling.

The investment bank, which foresees Chicago corn prices soaring back to $6.90 a bushel this summer, said that July futures "need to rally further, at least relative to wheat" to limit demand for the grain by livestock producers.

"The tight level of old-crop US corn inventories will require more wheat feeding in the coming weeks," Goldman analyst Damien Courvalin said.

"As a result, we expect July Chicago wheat prices will return to trading at a discount to corn prices."

The rapid pace of the US harvest would contribute to the dynamic by boosting short-term wheat supplies, Mr Courvalin said, if forecasting that, longer term, downgraded forecasts for US stocks of the grain would contribute to it regaining a "sustainable premium" over corn.

'Downside limited'

Goldman forecast a floor to values of US corn from the 2012 harvest too, flagging the six-point cut, to 66%, on Monday in the proportion of the crop rated in "good" or "excellent" condition by the US Department of Agriculture.

"The downside to current new-crop prices is limited given ongoing dry weather conditions in the US, with the USDA reporting [a] lower crop conditions rating," Mr Courvalin said.

Indeed, the dry weather was creating "upside risk" to the bank's forecasts of corn prices standing at $5.25 a bushel on six and 12-month horizons.

Chicago corn for December delivery stood just below the Goldman forecast at 13:00 local time (19:00 UK time), at $5.14 ¾ a bushel, with the July 2013 contract above, at $5.33 ½ a bushel.

Yield debate

The comments came as analysts continued to debate prospects for the US corn yield, for which the USDA in its benchmark Wasde crop report on Tuesday kept its estimate at a record 166 bushels per acre.

"Despite rapidly declining corn ratings due to key growing areas dealing with dry conditions, the USDA did not step back from their estimate," Jon Michalscheck at Benson Quinn Commodities said.

"Of late, many in the trade have been factoring in a sub-165, probably sub-164 bushels per acre yield on new crop corn."

Commerzbank said that because "marked recent deterioration in the condition of US corn plants as a result of drought... has clearly not been sufficiently taken into account as yet, we are likely to see downward revisions over the coming months" to production estimates.

'Lot of discussion'

At rival broker Country Futures, Darrell Holaday said: "There will be a lot of discussion about the fact that USDA left the yield at 166 bushels an acre."

However, investors should bear in mind that the forecasts were a reflection of data available to the USDA as of June 1, "which was a fast planting pace and very high crop rating".

In fact, according to Texas A&M University's Mark Welch a composite index formed from Monday's crop condition data came in at 368, "between where we were in 2009 on the way to a record yield, at 377, and the last time yields were just above trend in 2008," when the score was 361.

The USDA has estimated the trend yield at 164 bushels per acre, although many analysts consider this figure too high in that it excludes last year's disappointing result of 147.2 bushels per acre.

Market prices

Old crop corn prices indeed reduced their discount to wheat on Wednesday, recovering from a slow start to stand 1.9% higher at $5.95 ¼ a bushel, on talk of strong demand in the cash market from feedlots in the south west.

July wheat was 0.2% higher at $6.17 ¼ a bushel, a premium of $0.22 a bushel, compared with $0.32 at Tuesday's close.

The weakness in new crop corn was attributed to forecasts of rain for dry Midwest areas next week, following further heat this weekend.

"The bottom line still provides net drying and increasing crop stress late this week and into early next week as high pressure builds up across the Midwest briefly," weather service World Weather said.

"Relief then comes later next week with rain falling in many key crop areas at one time or another."