Wachovia Capital Markets analysts predicted corn prices could rise as high as $10 a bushel, but based on current feeder cattle price premiums to fed cattle, they doubt significant herd reduction is in the offing any time soon.

Comparing today's markets with the last big corn price rise in 1996, Wachovia livestock analyst Dan Vaught noted on a conference call that unlike 1996, when the market signaled a herd reduction by discounting feeder cattle prices to fed cattle, the opposite is true today.

"In my opinion, we are not going to see a big cutback in cattle supplies this year. Any decrease will be demand-driven, not supply-driven," said Vaught. He did, however, predict a significant price rally in the fall and into early 2009. "I do think we are going to see some liquidation, but I don't think it will be that great."

Vaught noted that cattle markets typically hold up well during recessions, because consumers buy more retail meat to eat at home instead of dining out. In addition, consumers putting off major purchases might reward themselves by eating well.

Vaught pointed to exports as the real wild card for both beef and pork, pointing to continued uncertainty over South Korean beef imports and cautioning that China is rebuilding its hog herd. By the fall of 2009, "I think China will be swamped with hogs," he predicted.

Corn crop scenarios

Wachovia analyst Bill Nelson forecast the U.S. corn crop could dip to 11 billion bushels, compared to USDA's current 11.7-billion-bushel estimate, which he said would put cash corn prices at about $7.50 per bushel.

A 10-billion-bushel crop could push prices to $9 to $10 per bushel, he said. Conversely, in the unlikely event of bumper crops outside flooded areas, corn prices could recede to about $6.00 per bushel.

On Thursday, Secretary of Agriculture Ed Schafer estimated 4 million acres of cropland are flood-damaged. USDA announced on Thursday that it will follow up its June 30 Acreage report with further assessments in July, as the June data will have been taken before most of the recent flooding occurred.

Nelson said the market is now expecting corn yields at about 145 bushels per acre, compared to 151 bushels per acre a year ago.

As a cautionary tale, he noted that as a result of massive Midwest floods in 1993, corn production ended up 25 percent lower than expected. Such a scenario this year could drop the crop by 3 billion bushels.