Goldman Sachs Recommends French Wheat on Export Outlook

Wheat traded in Paris may rise relative to futures in Chicago as prospects of declining production in the former Soviet Union mean Europe is likely to gain export market share, Goldman Sachs Group Inc. said.

Goldman Sachs recommended buying wheat for delivery in March 2013 on NYSE Liffe in Paris, against a bearish bet for March 2013 wheat on the Chicago Board of Trade, New York-based analyst Damien Courvalin said today in an e-mailed report. CBOT wheat prices have surged 41 percent since the end of May, bolstered by drought in the U.S., while Paris wheat climbed 23 percent in the same period.

Russia and Ukraine, which also have suffered from dry weather this year, face “potential for export restrictions” on grain, Courvalin said. In 2010, Paris wheat surged 92 percent, outpacing a 47 percent gain in Chicago futures, after the worst drought in 50 years spurred Russia to halt exports for 10 months.

“With CBOT wheat prices trading at a premium to Black Sea and EU wheat prices despite higher freight costs, we expect this export demand to initially be directed to EU-27 wheat supplies,” Courvalin said. Shipments from both the EU and the U.S. may be larger than the U.S. Department of Agriculture currently estimates, he said.

The U.S. is expected to be the world’s biggest wheat exporter this year, followed by Australia, Canada, the 27-country bloc of the European Union, and Russia, according to the USDA.

World Production

Global wheat production may total 652.1 million metric tons in the 2012-13 season, less than the USDA’s July forecast of 665.3 million tons, as smaller harvests in Russia, Kazakhstan, Argentina and China offset increasing output in the U.S., EU and Canada, Courvalin wrote. The USDA is scheduled to update its outlook on Aug. 10.

Goldman pegged global wheat inventories, excluding China and India, at 93.7 million tons, the lowest since the 2007-08 season, according to the report.

U.S. corn production may be 10.75 million bushels, below the USDA’s forecast of 12.97 million, Courvalin said. Demand for wheat used in livestock feed may increase in coming months as drought slashes corn supplies, he said.

“A further deterioration in weather conditions, potential FSU export restrictions and pent-up import demand create risks that global wheat inventories decline even more than we expect,” Courvalin said. “Such an outcome in the face of inelastic food demand would likely push wheat prices sharply higher and well above corn prices to price wheat out of feed demand.”

The bank reiterated its forecasts for CBOT wheat prices at $9.80 a bushel in three months, $8.75 in six months and $7.75 in 12 months. The December contract traded today at $9.09.

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