Unprecedented strength in corn continues, with futures rising by 4.5% on Thursday, following strong demand for corn to make food and fuel. That demand has whittled down the corn supply, which was already at its lowest level in 15 years in the United States, the world's top exporter of the grain. Per Reuters: " Demand has been strong from the livestock and ethanol sectors, and from importing nations, including China which is believed to have purchased 1.25 million tonnes last week. This week's rally, triggered by the U.S. Agriculture Department's lower-than-anticipated quarterly U.S. corn stocks estimate on Thursday, rekindled worries about food price inflation. The near-term supply concerns have largely overshadowed USDA's forecast that U.S. farmers will plant the second-largest corn acreage since 1944." Yet whether due to fundamental reasons or pure momentum, Goldman has just added more fuel to the fire by raising its corn price forecast, after having lowered it a whopping 10 days ago, from $6.00/bu and $5.80/bu to $7.80/bu and $7.00/bu, for 6 and 12 months respectively. Of course, all those who followed Goldman's recent downgrade made some very inverse profits. So it may well be time to trade against the squid yet again.
From Goldman Sachs:
The USDA Grain Stocks report featured corn stocks significantly below consensus expectations. These tighter old-crop inventories will require higher prices in the short term to finally ration demand. Further, despite corn winning the acreage battle, we reiterate our expectation for only a modest build in corn inventories in 2011/12. As a result, we raise our corn price forecasts to $8.60/bu in 3-mo, $7.80/bu in 6-mo and $7.00/bu in 12-mo. We recommend that consumers take advantage of the current backwardation in the corn futures curve to enter into longer-dated hedges.
Old-crop corn significantly tighter than expected…
The real surprise in yesterday’s USDA reports came from corn stocks, which were below the low end of expectations. This confirms that recent high prices have yet to achieve a slowdown in feed demand, and with strong weekly ethanol and export demand, point to a further drawdown in old-crop inventories. As a result, we believe that corn prices need to rise strongly in the near term to ration demand, including feed. Accordingly, we are raising our 3-mo corn price forecast to $8.60/bu. We expect ethanol demand rationing will be harder to achieve, as a $3.00/gal RBOB price and a $0.45/gal blender tax credit require prices above $10.00/bu to push the ethanol production cost above the price of gasoline.
… leading us to raise our corn forecasts despite acreage gains
We had lowered our new-crop corn price forecast on March 20, on the view that stabilizing inventories, as reported in the Feb/Mar WASDE, and higher acreage would allow for a modest inventory build and in turn moderately lower prices in 2011/12. While we maintain our outlook for the 2011/12 corn supply response, lower beginning stocks mean that our forecast for a sequential modest decline in prices will start from a higher level. As a result, we raise our 6- and 12-mo price forecasts to $7.80/bu and $7.00/bu from $6.00/bu and $5.80/bu previously, above the current forward curve.
Focus now shifts to weather, with price risk skewed to the upside
In the short term, the focus will be on precipitation in the Midwest as wet conditions lead farmers to swap corn for soybean acreage. Further, lower inventories suggest strong asymmetry in the price response to weather: it would take very favorable weather to push new-crop prices significantly lower than our new forecast, while any weather disappointment will limit inventory build and push corn prices even higher to further ration demand. We therefore recommend investors and consumers layer in upside exposure/hedges in Dec-11 corn prices.
In other words it is likely time to sell it all...
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