(AgriMoney) – Soybean and hard wheat futures look undervalued – but not for contracts this side of 2017, Societe Generale said, forecasting that investors may have already overegged short-term price prospects.
While the bank raises its price forecasts for most major grain contracts, by up to $2.84 a bushel for soybean futures, its outlooks for the rest of 2016 remained below those that investors are factoring in.
For corn, the bank forecast Chicago futures averaging $3.94 a bushel in the last three months of this year, below the price of $4.16 ¼ a bushel being factored in on Thursday by the December contract.
“US corn farmers are well on their way to finish planting another large corn crop,” SocGen analyst Rajesh Singla said, saying that the grain “remained more profitable” for farmers than rival soybeans during the key January-April period for making sowings decisions.
The bank also raised doubts on the demand side, of US corn exports rising by 175m bushels to 1.90bn bushels in 2016-17, as forecast by the US Department of Agriculture.
“With the sharp increase in corn exports from Argentina and expectations of a recovery in production in the EU, South Africa and Asia in 2016-17, US corn exports likely will face tough competition,” Mr Singla said.
‘Market may remain tight’
However, SocGen was more upbeat on prospects for soybean prices heading into next year, despite pitching prices for the rest of 2016 below the futures curve, seeing Chicago futures average $10.59 a bushel in the last three months of this year.
November futures were on Thursday trading at $10.71 ½ a bushel.
Soybean prices will jump to average $11.09 a bushel in the first three months of 2017 – well ahead of the $10.43 a bushel being priced in by March futures.
The bank cited a tightening to soybean supplies both from demand from China, where raised income and pork prices “should continue to support higher soybean imports”, and in production terms from South America.
“Brazil and Argentina, two key soybean exporters are showing signs of peaking soybean yields.
“We believe that with slowing acreage growth and peaking soybean yields, the soybean market may remain tight in the future.”
Farmer losses
And for wheat, it also saw some prospect for price gains in early 2017 beyond those investors are already pricing in – at least for Kansas City hard red winter wheat, which it forecast averaging $5.24 a bushel in the January-to-March period.
March 2017 futures were on Thursday trading at $5.13 ½ a bushel.
SocGen cautioned of a further drop in US sowings ahead, from levels which are already historically low, given that prices are “significantly below the cost of production”.
In fact, US wheat farmers on average face a loss of $120 an acre on wheat, once fixed costs are factored in, compared with a $51-an-acre profit on soybeans, the bank said.
Key spreads
The continued drop in wheat sowings should benefit in particular prices of hard red winter wheat, the biggest class in the US harvest, which should regain parity with Chicago soft red winter wheat “by the end of year”, and renew its typical premium early in 2017.
Kansas City wheat, currently trading at a discount of nearly 4% to its Chicago peer, July basis, typically trades at a premium of about 8%, earned by its higher protein content.
SocGen also flagged that the relatively weak wheat prices had cut their premium over corn to some 15% in Chicago, compared with a long-term average of 37%.
“This may increase wheat’s competitiveness versus corn for feed usage.”
