Goldman Sachs slashed its forecasts for corn, soybean and wheat prices by up to $2.25 a bushel, citing the prospect of a "large" South American harvest to replenish inventories sapped by last year's droughts.

The investment bank highlighted the potential for further cuts to forecasts for dryness-threatened corn and soybean crops in Argentina, which the US Department of Agriculture downgraded on Friday in its monthly benchmark Wasde crop report.

"However, while we see downside to the USDA's updated Argentina soybean production forecast, this does not derail the large production rebound in the region," Goldman analyst Damien Courvalin said.

"As confidence grows in the size of the South America crops, and as we near the ramp-up in local exports, we are lowering our… price forecasts for corn and soybeans."

US drought threat

The bank acknowledged the threat that remained to crop prices from the US drought, whose fate "remains the key to corn and soybean prices in the second half of the year.

"While weather has improved in the eastern Corn Belt, and points to a large early harvest this summer, the western Corn Belt remains dry and requires a steady increase in precipitation in coming months," Mr Courvalin said.

Indeed, although cautioning that "normal weather conditions would push crop prices sharply lower", the bank left its downgraded estimates for corn and soybean prices in the six- and 12-month outlooks above the futures curve.

This "accounts for the possibility that the US drought will limit recovery in US production".

Relative vs actual prices

However, the low level of US corn and soybean inventories for now appeared set to prove more significant in supporting a premium between nearer-term contracts than those relating to periods further ahead, rather than in prompting higher actual prices.

"Importantly, we expect that the low level of US inventories will prove more supportive to Chicago corn and soybean timespreads than prices," Mr Courvalin said.

This refinement was echoed by other commentators too, including Richard Feltes at US-based broker RJ O'Brien, who said that Friday's futures movements in Chicago "suggest more opportunity in spreads than flat price".

Kim Rugel at Benson Quinn Commodities, saying that it may be a "tough task" to lift soybean prices for now, added that "spreads though should remain strong as the US producer shuts off selling, and the large task of cutting usage in the second half of the [2012-13 marketing] year begins".

Corn vs wheat

Goldman said that its cut to forecasts for wheat prices reflected largely consideration of the grain's premium to corn.

With the grains alternatives for some uses, in livestock feed and to some extent in ethanol production, their prices typically move in tandem to some degree.

"We believe the key to wheat prices near term remains the outlook for US exports. Absent a sharp acceleration in sales, we would expect the Chicago wheat-to-corn price spread to narrow further into the spring.

"In the medium term, we see the potential for a smaller recovery in wheat inventories than for corn and soybeans given adverse weather conditions in key winter wheat growing regions," a dynamic making for a recovery in wheat's premium.

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