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A story on crop prices from the other side

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Are crop investors missing vital clues?

There are two variables which feed into the all-important crop inventory numbers which, in indicating the readiness of supplies, play big parts in determining prices.

However, only one input – production - seems to get the full analytical workout.

That approach sometimes passes muster. The influences on crop yields, notably weather, tend to be far more volatile than those on consumption, which drift with economic and population growth and so warrant less frequent attention.

Not this time. Many of the crops the US Department of Agriculture opined on its first estimates for 2011-12 are not even in the ground yet.

But the demand figures are already telling a story. And with US exports of wheat, corn, barley, sorghum, rice, soybeans, soymeal and cotton set to drop, it is an important tale too.

'Not hugely convincing'

Sure, a chunk of the US export declines can be explained by the better prospects for foreign producers.

The Black Sea, usually a big grains exporting region, has been sidelined by drought damage to last year's crops. And some importers look on for better crops, such as Egypt in wheat and China in cotton, tempering their need for buy-ins.

But there are plenty of apparent anomalies. Many analysts would take issue with the idea that China will in 2011-12 import 500,000 tonnes of corn, one-tenth of the sum that some observers have been talking about.

An estimate of a dip to 16.1m tonnes in Japan's purchases of the grain was deemed Standard Chartered's Abah Ofon as "not look hugely convincing".

Bigger picture

And that's before looking at the broader consumption picture.

Sure, a USDA forecast of 1.3% growth in world wheat demand is bang in line with the 10-year average.

But the estimate for corn consumption growth, at 2.7%, lags the typical 3.3%.

For soybeans, forecast demand expansion of 3.3% represents at only half last year's rate, and is well below the decade mean too.

Limited supplies

Does that stack up when world economy is to grow at a solid 4.5% this year and next, according to the IMF?

It does if there are not the crop supplies around to support quicker consumption growth.

The USDA appears to be starting off the crop year with the idea of demand rationing firmly entrenched. And that signals a prop for prices, if not necessarily one tall enough to keep them at the highs reached earlier this year.


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