Goldman Sachs calls time on food price explosion

by Agrimoney.com

Goldman Sachs, cutting forecasts for crop futures, called time on the food price explosion, saying deflation will kick in by the end of the year thanks to the knock-on effect of richer US corn supplies.

The investment bank said that, while prices of a basket of farm products will this autumn still be running ahead of those a year before, the comparison will have turned negative by December.

Goldman Sachs corn price forecasts and (change on previous) Three months: $5.90 a bushel, (-$2.10) Six months: $5.75 a bushel, (-$2.05) 12 months: $5.70 a bushel, (-$1.30) Prices for Chicago spot contract

"Running our updated forecasts through simple modelling points to… a sharp easing in agriculture inflation by year end," the bank said, forecasting that prices would finish 2011 about 7% cheaper than they closed 2010.

The forecast of food costs dropping off the inflation agenda comes amid continuing calls for measures to stem prices, with Pope Benedict on Friday urging a clampdown on speculators, saying crop markets are "without clear rules" and have "thin moral principles".

The G20 last week issued a communiqué recommending action to tackle food prices, although only after watering down talk on measures such as clampdowns on biofuels and crop export bans.

'Lower deficit chance'

Goldman Sachs' forecast came as it slashed its crop price expectations following Thursday's surprise US Department of Agriculture data which sent grain futures plunging.

Goldman Sachs wheat price forecasts and (change on previous) Three months: $5.90 a bushel, (-$2.10) Six months: $6.00 a bushel, (-$2.35) 12 months: $6.20 a bushel, (-$2.15) Prices for Chicago spot contract

The USDA estimates showed that corn sowings this spring trounced forecasts, reaching their second highest since World War II, and revealed far more of the grain left over from last year's harvest than had been expected.

The data "suggest that corn prices do not need to incentivise demand destruction this summer and strongly lowers the probability that the 2011-12 US corn balance will be in a deficit under average weather conditions", Goldman analysts said.

The bank lifted to 900m bushels, above a May estimate of 707m bushels, its estimate of US corn inventories at the close of 2011-12, and cut its forecast for the price of Chicago's near-term lot in three months' time to $5.90 a bushel, from $8.00 a bushel.

Soybeans vs corn

The bank made an identical cut to its forecast for Chicago wheat futures, despite acknowledging that the USDA's reports on Thursday were "fairly neutral" to the US outlook for the grain.

Goldman Sachs soybean price forecasts and (change on previous) Three months: $13.00 a bushel, (-$1.00) Six months: $14.75 a bushel, (-$1.00) 12 months: $14.75 a bushel, (-$1.00) Prices for Chicago spot contract

"We believe that the decline in corn prices that we forecast will also weigh on wheat prices," Goldman said.

Expectations for soybeans were also trimmed, despite the USDA data, in signalling weaker-than-expected sowings, implying slightly tighter American supplies of the oilseed.

"Our modelling suggests that the soybean-to-corn price ratio is strongly driven by the relative tightness of both crops.

"As a result, we expect soybean prices to outperform corn prices, yet also reflect our expected lower corn price forecast."

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