Societe Generale analysts have lifted their forecasts for grain prices into 2012, warning that the severity of this year's production shortfalls may take more than a season to fix.

The bank forecast the grains rally peaking in the first quarter next year as depleted supplies, which on its calculations will reduce US corn stocks to a 40-year low of 3.2m tonnes at the close of 2010-11, force buyers to pay up.

However, the peak will be far higher than it had expected in its last commodities outlook report, in September.

Societe Generale lifted by 13% to $7.70 a bushel its forecast for the average price of Chicago wheat in the first three months of 2011, by 27% to $6.60 a bushel its forecast for the average corn price and by 30% to $13.60 a bushel its estimate for soybean prices.

'Uncertainty and nervousness'

Furthermore, it forecast that futures would not collapse from their peak, as after the 2008 price spike, but enter a "moderate" decline which would see Chicago wheat, for instance, remain near $7 a bushel for the rest of the year.

While high prices were likely to foster a rebound in production, "it may not be enough to restore an adequate level of supply".

"Steady growth" in global demand for grains alone would require an extra 30m-40m tonnes of crop production to meet, even before the replenishment of "uncomfortably low" inventories after the weather setbacks to European, North American and Black Sea crops.

"In total, world grain production will need to increase by up to 100m tonnes to a record of 1.80bn tonnes," a figure which while possible, given that the US alone could raise output by 40m tonnes, required better-than-average weather conditions.

"Against this background, we think that uncertainty and nervousness will consistently hang over any projected forecasts for a surplus in 2011-12," the bank's report said.

Next season "will represent a crossroads, and that another year of global deficit cannot be completely ruled out at this stage".

'Warning signal'

Societe Generale's bullish price forecasts reflected in part expectations of further cuts to estimates for 2010-11 crops, with the La Nina weather pattern, associated with dry weather in parts of South America, to knock 4m-5m tonnes from expectations for the continent's soybean harvest.

"We tend to consider that the lack of rain which severely delayed soybean plantings in Mato Grosso, or wheat plantings in Argentina, was a warning signal," the note said.

For corn, it warned that China's crop could come in short of official forecasts, noting that private analysts and the US Grains Council had come up with estimates well below the US Department of Agriculture's figure of 168m tonnes.

A rise in Chinese corn prices since January last year, and the rally's resilience to recent measures by Beijing to clamp down on food inflation, appeared evidence of constrained supplies.

Chicago vs Paris 

World wheat inventories were set to end 2010-11 at a "comfortable" 26% of demand, looser than soybean stocks, which would finish at a "satisfactory" level of 22%, and corn stocks, on course to fall to a "meagre" 16% of consumption.

However, wheat's global overview masked the potential for Europe's strong pace of exports to deplete its stocks of the grain to 8.6%, tighter than in 2008, when Paris prices hit E300 a tonne.

"In other words, we think that European wheat exports are going to have to slow down in the second half of the marketing season," Societe Generale said, a process which would require Europe's prices extending their premium of about $40 a tonne over US wheat to "at least" $60 a tonne.

At current prices, "competition is even and European exports show no sign of slowing down. This is why we think that this spread may need to rise further".