New York, 27 January 2011

Morgan Stanley are lifting their price forecasts across the agriculture space and are most bullish corn and beans. "Our review of the space leaves us more concerned than we have been in the five years that we have been writing on this space," according to Hussein Allidina of Morgan Stanley Research.

Morgan Stanley's long-term thesis, first introduced in early 2008, remains unchanged. Specifically, new greenfield acreage is needed - which will come only with a sustained increase in price - to meet growing demand. The lag between higher prices and increased acreage, however, will deplete inventories, forcing prices to ration demand.

"US corn inventories have fallen to near record lows, and despite the resulting rally in price, demand is not being sufficiently rationed. Absent higher prices - to above $8.00/bu - inventories could be depleted. Even if prices move higher to ration demand, US farmers must still plant 91.2 mln acres to prevent a further draw in inventories, which may prove challenging given competition from the tightness in soybean, cotton and to a lesser extent wheat balances.

"The soybean balance will not provide any respite. We see US stocks-to-use falling to record lows by the end of 2010/11, and beans need to maintain acreage in 2011 to prevent a further inventory decline.

"Wheat will be dragged higher to protect acreage. Supply disruptions could lift prices materially above our forecasts as inventories in exporting countries are near the lows seen in 2007/08 and inflation concerns are mounting and likely to prompt policy moves.

"Given the tightness across the balances, any incremental weather disruption would likely leave our estimates as conservative."

Ends --

Morgan Stanley Research