by Agrimoney.com
Agricultural commodity prices face "downside risk" – for now - Goldman Sachs analysts warned, while Rabobank said record corn values could still be on the agenda, as analysts reacted to an end to ever-tighter forecasts for crop supplies.
Goldman Sachs urged investors to sell out – at a profit - of the cotton contract it recommended for purchase four months ago, having let a buy rating on Chicago corn for March lapse with the contract.
The shift reflected the "inventory stabilisation" evident in the US Department of Agriculture's influential monthly Wasde report into world crop dynamics, which ended a long run of declining forecasts for world agricultural commodity stocks.
The USDA's unchanged estimate for US corn inventories at the close of 2011-12 followed nine successive months of downgrades.
"We believe that this stabilisation will put a lid on crop prices in the near-term," Goldman analyst Damien Courvalin said.
"We actually see downside risk to crop prices in the near term," he added, singling out corn and cotton, for which a March plantings intentions report due at the end of the month is expected to show particular gains in US farmers' sowing plans.
'Supplies are not short'
The report also provoked a downbeat response from other observers, including AWB, the Australian grain handler, which said the data "provided further negative direction to markets", while Commerzbank said they showed that the "upside potential for wheat is largely exhausted".
At Commonwealth Bank of Australia, Luke Mathews said that a "sizeable" 4m-tonne upgrade to world wheat inventories had left the global stock-to-use ratio at 27.4%, showing that "old-crop wheat supplies are not short".
However, analysts stopped short of writing obituaries for the agricultural commodities rally, with Goldman Sachs warning that, overall, "average weather conditions in 2011 will not be sufficient to significantly rebuild critically low inventories, and will keep crop prices elevated".
"Any weather disappointment in either the planting or growing months in the northern hemisphere would likely push crop prices above their current highs," the bank said, maintaining a recommendation for investors to hang on to November soybean exposure.
"Strong competition from both the corn and cotton crops in the US will limit the expansion of soybean acreage."
$8 a bushel corn?
Commerzbank was upbeat over corn prices, saying that Thursday's fall of more 2% was an "exaggerated" reaction to the Wasde estimates.
"At 17m tonnes, [US] corn inventories remain at a 15-year low," the bank said.
And Rabobank analysts pointed out the incentive for ethanol producers provided by high oil prices at a time of declining corn costs.
"The economics of blending ethanol have increased significantly, as ethanol prices have risen more than 5% year to date gasoline has increased more than 20%," the bank said.
"This gives a further incentive for ethanol production to persist above USDA's forecast.
"As gasoline prices approach $3 a gallon, we estimate corn must trade at $8 a bushel in order to reduce corn demand for ethanol."
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