Corn Prices per Bushel High 8 USD as Tight Supply

Corn prices still hold potential to climb to all-time highs around $8 a bushel by August because of tight supplies, even with the prospect that a record harvest will help the U.S. rebuild historically-low inventories, according to Goldman Sachs Group.

The U.S. Department of Agriculture?s latest Supply and Demand report indicated that strain on corn supplies will ease after this fall?s harvest, said Damien Courvalin and Allison Nathan, who are analysts with the big Wall Street bank.

Still, projected inventory builds ?remain modest,? the Goldman Sachs analysts said in their monthly agriculture market update released May 11. ?This outlook leaves weather as the key driver for crop prices until this fall.?

Following the May 11 USDA report, the Goldman Sachs analysts lowered their projected three-month target for near-term corn futures to $8 a bushel from $8.60 previously, citing lower exports and a lack of ?feed demand catalysts? over the next month.

?We continue to expect a tighter U.S. old-crop balance on higher corn feed demand, and in turn higher corn prices,? Courvalin and Nathan wrote. The analysts also lowered their soybean price forecast, though they expect hog and cattle futures to rise over the next three months.

If the Goldman Sachs forecasts are correct, livestock feeders and other major corn users will receive only temporary relief after prices dropped sharply from record highs in April. The USDA?s supply estimates, released May 11, triggered a sell-off in CME Group grain futures, sending corn prices to six-week lows.

At the close of trading May 12, corn futures for delivery this month rose 11 ? cents to $6.80 a bushel, while July futures rose 2 cents to $6.79 ?. Corn futures touched an all-time high of $7.83 ? on April 11.

The USDA, in the May 11 report, projected the 2011 U.S. corn harvest at 13.51 billion bushels, which would be up 8.5 percent from 12.45 billion bushels in 2010 and top the current record of 13.09 billion bushels in 2009.

Additionally, the USDA hiked its estimate for U.S. corn stocks at the end of the 2010-11 marketing year Aug. 31 by 8.1 percent, to 730 million bushels, contrary to many analysts? expectations for a decline. By the end of the 2011-12 marketing year, stockpiles are projected to rise 23 percent, to 900 million bushels, the USDA said.

But Goldman Sachs analysts were skeptical U.S. supplies will expand that much, in part because of the prospect that China?s corn imports next year will be greater than the 500,000 metric tons estimated by the USDA.

?We see an even tighter new-crop U.S. balance on our expectation for lower beginning stocks and higher exports? for corn, the analysts said. They reiterated previous forecasts for corn prices over the next six and 12 months, at $7.80 and $7, respectively.

New York-based Goldman Sachs is a large commodity trader and its price outlooks for oil, grains and other markets have drawn increasing attention in recent years. In some cases, Goldman Sachs? forecasts have contributed to market moves, traders and analysts say.

?Goldman is a big name? and they have been leveraging their name into commodities in the last few years,? Jack Scoville, an analyst with Price Futures Group in Chicago, said in a May 12 e-mail. ?The fact that Goldman is talking, combined with the customer base they have that can move markets, means that we have to pay attention to what they say,? Scoville said.

?I do not think nor have I seen anything that tells me that they have any better insight into what goes on here than anyone else,? Scoville added. ?So it is the name and the type of client they have as much as anything that makes them worth noting.?

During the first quarter, Goldman Sachs generated revenue of $4.33 billion from its fixed-income, commodity and currency trading, down 28 percent from the same period a year earlier, the bank said in April. Commodity revenue was higher, the bank said, though it didn?t provide a specific figure.

Goldman Sachs also trimmed its projection for soybean futures for the next three months by $1, to $14 a bushel. Prices may rise to $14.75 over the next six months, they said.

Corn has become too expensive for some overseas buyers, leading to a drop in demand that could ease the country's tight supply and bring food prices down later this year.

The Agriculture Department estimates that U.S. corn exports are going to drop by about 50 million bushels this summer. That would help boost the year-end corn surplus to 730 million bushels in late August, when the harvest begin ? an 8 per cent increase from the previous estimate.

An even larger corn crop is being planting now. The government projects the supply will grow to 900 million bushels by late 2012.

That's likely to ease supply concerns and push global prices lower. Corn prices have more than doubled since last summer and closed Tuesday at $7.07 a bushel. That just shy of the all-time high of $7.76 reached on April 11.

Investors typically like to see a surplus of corn that could feed the U.S. population and supply U.S. feed and ethanol producers for 30 days. The current projected surplus would last nearly 20 days, up from last month's estimate of 18 days. By next year, the government expects the supply would satisfy U.S. demand for 24 days.

The price has risen as growing demand from ethanol producers and overseas consumers has outstripped supplies. As corn became more expensive, it pulled wheat and soybean prices higher. That's partly because farmers planted less acreage of those crops and focused on planting corn to cash in on the high prices.

The government report suggests that the high prices are finally curbing demand, at least overseas. Corn exports are likely to decrease by about 3 million bushels a week until August.

"The idea behind that is that prices are high enough to ration demand," said Jason Ward, an analyst with Northstar Commodity in Minneapolis. Corn prices began falling last week as investors sold off contracts in commodities from oil to grains and metals, betting that consumers will start cutting back spending in light of high prices.

Higher corn and soybean prices affect most products in supermarkets. The crops are used to feed livestock and chickens and are the main ingredient in cereals and soft drinks. But it can take months for high crop prices to work their way to the grocery store shelves. That's because food processors and grocers are reluctant to pass on the higher costs to consumers when unemployment is high.