Corn woes spur Rabobank to lift grain price hopes

Rabobank edged its forecast for US grain futures higher, despite warning that the elevated corn prices were driving ethanol producers towards breakeven and could drive exports to their lowest since the 1990s.

The bank – in a report which slashed expectations for cotton prices – said that the lower corn harvest expectations following last month’s "extreme heat" in the US Midwest would keep Chicago futures above $6.50 a bushel until at least the April-to-June quarter of 2012.

"Yield downgrades following July heat underpin higher prices throughout the course of the 2011-12 season," Rabobank analysts said in a report.

Corn exports looked set to take the brunt of the rationing caused by higher prices, with users turning increasingly to wheat as an alternative, lowering US shipments "closer to" 1.5bn bushels, a figure not seen for 18 years, than the US Department of Agriculture’s 1.75bn-bushel figure.

‘Crimped blending margins’

However, even corn ethanol plants, over which Rabobank has been upbeat, were feeling the pinch now that oil prices had fallen even as prices of the grain have rebounded.

Rabobank corn, soybean price forecasts and (change on July’s)

Q3 2011: corn, $7.05 a bushel, (+$0.05); wheat, $7.10 a bushel, (+$0.05)

Q4 2011: corn, $6.85 a bushel, (+$0.05); wheat, $7.05 a bushel, (+$0.05)

Q1 2012: corn, $6.75 a bushel, (unch); wheat, $7.00 a bushel, (unch)

Q2 2011: corn, $6.50 a bushel, (+$0.50); wheat, $6.75 a bushel, (+$0.25)

Price forecasts average for quarter

"Our modelling suggests that the recent weakness in energy prices has crimped blending margins to a level which requires the $0.45-per-gallon blenders’ credit to provide a positive return," the note said.

With the credit viewed likely to be allowed to lapse at the end of the year, and the US Senate calling for an even quicker end to the perks, the analysis suggests gloomier times ahead for corn ethanol groups, although some operations, such as those run by The Andersons, have experimented with using wheat instead.

Rabobank joined the International Grains Council in forecasting that use of US corn for making ethanol would not rise at all in 2011-12, after quintupling over the previous nine seasons.

US vs rest of the world

Wheat prices looked like staying higher too, lifted by disappointing prospects for the US crop besides the quest to find alternatives to corn.

Indeed, bank said it saw US wheat prices "decoupling" from those abroad, which would be kept in check by healthy supplies from Australia, the Black Sea and Canada.

A crop tour by Rabobank analysts in mid-August revealed "there was still considerable field damage" after a wet spring, "with flooding prevalent in many areas due to additional heavy rain" this month.

"We suspect there may be further downward revisions to both planted and harvested hard red spring wheat acreage from the US Department of Agriculture as survey data is cross-checked with crop insurance data."

‘Challenging economic environment’

However, the bank took a more mixed view of New York sugar prices, lifting an estimate unveiled last week for the world production 2011-12 surplus by 100,000 tonnes to 9.6m tonnes.

Rabobank cotton, sugar price forecasts and (change on July’s)

Q3 2011: cotton, 105 cents a pound, (-15 cents); sugar, 28 cents a pound, (-2 cents)

Q4 2011: cotton, 95 cents a pound, (-20 cents); sugar, 25 cents a pound, (-2 cents)

Q1 2012: cotton, 90 cents a pound, (-20 cents); sugar, 23 cents a pound, (+2 cents)

Q2 2011: cotton, 85 cents a pound, (-20 cents a pound); sugar, 22 cents a pound, (+1 cent)

Price forecasts average for quarter

"The crop outlook in the northern hemisphere is generally good, with larger harvests forecast in Europe, Russia and China," the briefing said.

The estimate for New York cotton prices was slashed to see them falling below 100 cents a pound in the next quarter, after more than a year above the $1 mark.

"The challenging economic environment is expected to play a role in lower prices, as cotton prices are generally very vulnerable to economic growth expectations."

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