The current food commodities rally is to prove more sustained that the last, as strong demand mops up a big chunk of rising crop production, Goldman Sachs has said, forecasting "still historically high" prices in 2012.
While futures prices will be unable to maintain the current pace, they will remain well above levels before the latest rally kicked off in late June, the investment bank said.
Supplies will remain under pressure from firm consumption from biofuels plants and livestock farms, both in the US and emerging markets, with American soybean inventories potentially on course to fall to 4.0%, as a proportion of use, the lowest since the 1960s.
"Although we expect a supply response to the current tight balances in the 2011-12 crop year, the concurrent tightening across all major crop balances and the continued strong demand from feed and fuel will likely limit the recovery in inventories," Goldman said.
"As a result, our outlook for the 2011-12 crop year points to sustained elevated crop prices, and we introduce 2012 crop price forecasts only slightly below our 2011 forecasts."
Acreage battle
Soybean prices appeared the best-placed for gains, requiring a move "sharply higher" to some $14 a bushel to "limit acreage loss" in the US, the oilseed's biggest producer, in the spring and lift sowings in South America to meet resilient demand.
Forecasts for continued strong Chinese economic growth in 2011 and 2012 imply "further remarkable strength of Chinese soybean consumption, supported by rising protein consumption and surging animal feed [needs]," Goldman said, adding that South American demand was expanding fast too.
"In particular, biodiesel demand in Brazil is growing strongly, supported by the steady increase in required biodiesel mix into diesel."
Chicago soybeans for November 2011 delivery offered an "appealing entry level", the bank said, rating the contract a "buy".
'Strong feed demand'
Corn prices, which stood above $5 a bushel for less than nine months in the 2007-08 rally, were set to remain at some $5.85 a bushel into late 2011, and average $5 a bushel even in 2012.
"Our expectation for continued recovery in developing market and growth in emerging market protein consumption points to continued strong corn feed demand in 2011-12," Goldman said, noting that cattle placements on US feedlots had remained larger than expected, given firm feed prices.
Even if a tax credit on blending corn-based ethanol into forecourt fuel is rescinded at the end of this year, gasoline price forecasts suggest that biofuel groups will remain in profit as long as the grain does not top $6 a bushel.
Weakest link
Wheat faced the worst prospects of the big-three traded crops, facing "some supply response" in 2011-12 on the "return of normal weather and some acreage gains".
"We expect that still large inventories combined with the supply response to current high wheat prices will generate a small increase in stocks-to-use levels both at the global and US level," Goldman said.
"This outlook points to lower new crop wheat prices."
The bank forecast wheat falling from $7 a bushel next year to $6.25 a bushel in 2012.
However, Goldman added that a range of factors could potentially upset its forecasts, notably the impact of the ongoing La Nina weather pattern on South American crops, the course of US biofuels policy and the lifting, or implementation, of export bans.
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