5th Dec 2012, by Agrimoney
Goldman Sachs recommended a commodity bet including a long position in corn despite forecasting a rise in sowings of the grain to a 77-year high in 2013, while putting soybean plantings on for a record.
The investment bank included corn, crude oil and a long position in copper balanced by a short in aluminium, in its so-called "CCB commodity carry basket" of raw materials set to outperform.
The trading recommendation springs from an overall forecast that commodities will return to trading patterns of the 1980s and 1990s, when near-term lots traded more frequently above far-away contracts, rewarding investors for buying and holding raw materials.
"As economic growth improves into the latter half of 2013, we believe that current fundamentals are likely to remain tight, increasing the positive carry in forward curves with near-term prices above long-term prices, which will likely create significant investment returns," the investment bank said.
"This stands in contrast to the 2000s, when forward curves for many commodities had negative carry with near-term prices below long-term prices, which acted as a drag on returns."
'Demand lag'
The bet on corn came despite the prospect of US corn production topping 14.0bn bushels next year for the first time, boosted by a rise in plantings of some 900,000 acres, and a return in yields close to 160 bushels per acre.
This was "sufficient to bring Chicago corn prices sharply lower in the second half of 2013, and potentially near $5.00 a bushel, as the recovery in demand will lag the production rebound", the bank said.
"Livestock herd expansion is a slow process, while rising ethanol imports from Brazil and the slow adoption of E15 will keep US corn ethanol production below its 2011-12 level."
'Corn prices are too low'
However, the bank foresaw the potential for corn prices to remain elevated at least for the first half of next year, given a disappointing US 2012 harvest, which "in the face of resilient demand requires prices to rise further to avoid inventories from falling to critically-low levels.
"While the upside potential for soybeans is greater should weather in South America deteriorate further, we have a stronger conviction that corn prices are too low. "Further, corn prices should follow a rally in soybean prices as corn cannot afford to lose acreage ahead of next spring's US planting season."
And corn prices may persist above $8.00 a bushel "should the US drought extend into the summer of 2013".
'Large supply response'
For soybeans themselves, assuming no weather hiccups, the "large ramp-up" in South American production expected at early-2013 harvests "will likely bring soybean prices to underperform corn prices," Goldman said.
"Average weather conditions in 2013 would bring a large supply response in the US and bring prices sharply lower in the second half of the year."US soybean sowings next year were pegged at 79.0m acres, a rise of 1.8m acres year on year, and enough to take production potentially to a record of a little under 3.4bn bushels.
However, the "key to soybean prices remains the transition from the current strong US export pace to the South American export ramp-up in February-March", Goldman said.
"Disappointing weather conditions during South American planting create risks that harvest and exports are delayed, pushing US stocks lower and prices sharply higher."
'Already-poor start'
Wheat prospects for 2013-14, meanwhile, are already clouded by setbacks to winter wheat seedlings in parts of Europe, with northern France and the UK beset by unusually persistent rains, and dryness hurting crops in the former Soviet Union and the US.
"As we turn to 2013-14, we see risks that the supply response may be limited as winter wheat crops in the northern hemisphere are off to an already-poor start," Goldman said.
Indeed, the bank forecast a small decline in US wheat output next year, as lower yields more than offset a rise in seedings.
"A further decline in global supplies in 2013 creates risks that global wheat inventories decline even further.
"Such an outcome in the face of inelastic food demand would likely push wheat prices sharply higher and well above corn prices to price wheat out of feed demand."
Goldman Sachs recommended a commodity bet including a long position in corn despite forecasting a rise in sowings of the grain to a 77-year high in 2013, while putting soybean plantings on for a record.
The investment bank included corn, crude oil and a long position in copper balanced by a short in aluminium, in its so-called "CCB commodity carry basket" of raw materials set to outperform.
The trading recommendation springs from an overall forecast that commodities will return to trading patterns of the 1980s and 1990s, when near-term lots traded more frequently above far-away contracts, rewarding investors for buying and holding raw materials.
"As economic growth improves into the latter half of 2013, we believe that current fundamentals are likely to remain tight, increasing the positive carry in forward curves with near-term prices above long-term prices, which will likely create significant investment returns," the investment bank said.
"This stands in contrast to the 2000s, when forward curves for many commodities had negative carry with near-term prices below long-term prices, which acted as a drag on returns."
'Demand lag'
The bet on corn came despite the prospect of US corn production topping 14.0bn bushels next year for the first time, boosted by a rise in plantings of some 900,000 acres, and a return in yields close to 160 bushels per acre.
This was "sufficient to bring Chicago corn prices sharply lower in the second half of 2013, and potentially near $5.00 a bushel, as the recovery in demand will lag the production rebound", the bank said.
"Livestock herd expansion is a slow process, while rising ethanol imports from Brazil and the slow adoption of E15 will keep US corn ethanol production below its 2011-12 level."
'Corn prices are too low'
However, the bank foresaw the potential for corn prices to remain elevated at least for the first half of next year, given a disappointing US 2012 harvest, which "in the face of resilient demand requires prices to rise further to avoid inventories from falling to critically-low levels.
"While the upside potential for soybeans is greater should weather in South America deteriorate further, we have a stronger conviction that corn prices are too low. "Further, corn prices should follow a rally in soybean prices as corn cannot afford to lose acreage ahead of next spring's US planting season."
And corn prices may persist above $8.00 a bushel "should the US drought extend into the summer of 2013".
'Large supply response'
For soybeans themselves, assuming no weather hiccups, the "large ramp-up" in South American production expected at early-2013 harvests "will likely bring soybean prices to underperform corn prices," Goldman said.
"Average weather conditions in 2013 would bring a large supply response in the US and bring prices sharply lower in the second half of the year."US soybean sowings next year were pegged at 79.0m acres, a rise of 1.8m acres year on year, and enough to take production potentially to a record of a little under 3.4bn bushels.
However, the "key to soybean prices remains the transition from the current strong US export pace to the South American export ramp-up in February-March", Goldman said.
"Disappointing weather conditions during South American planting create risks that harvest and exports are delayed, pushing US stocks lower and prices sharply higher."
'Already-poor start'
Wheat prospects for 2013-14, meanwhile, are already clouded by setbacks to winter wheat seedlings in parts of Europe, with northern France and the UK beset by unusually persistent rains, and dryness hurting crops in the former Soviet Union and the US.
"As we turn to 2013-14, we see risks that the supply response may be limited as winter wheat crops in the northern hemisphere are off to an already-poor start," Goldman said.
Indeed, the bank forecast a small decline in US wheat output next year, as lower yields more than offset a rise in seedings.
"A further decline in global supplies in 2013 creates risks that global wheat inventories decline even further.
"Such an outcome in the face of inelastic food demand would likely push wheat prices sharply higher and well above corn prices to price wheat out of feed demand."
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