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Are corn investors getting upset over nothing?

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Are agricultural commodity investors getting their knickers in a twist over nothing?

US Department of Agriculture officials came in for some choice carping after they failed, in their flagship monthly Wasde report on world crops, to cut their forecast for American corn inventories at the close of 2010-11.

Their estimate might appear bizarre - and was criticised as such - given they revealed last week that, at the half way point of the crop year, America's corn inventories were 170m bushels short of forecasts.

But in fact, the figure has a logic – and one which does not have the negative price implications that first glance suggests.

Bear case

Certainly, conventional analysis holds that a higher-than-expected inventory figure is bearish for corn prices.

The failure to cut the stocks estimate by 89m bushels, to the 586m bushels that the market had predicted, implies that corn consumption for the rest of the season will be smaller than analysts had thought.

And lower consumption makes for lower prices, right, if it means that buyers don't have to battle so hard to get hold of the grain.

Scraping the barrel?

Not so fast. What if the US Department of Agriculture believes that inventories are already, effectively, at their minimum?

Sure, Agrimoney.com has heard lower estimates, of about 600m bushels, for the so-called "pipeline" supply for US corn, at which available supplies run dry.

But the USDA's 675m-bushel figure has a logic. At 5.0% of consumption, it already matches the tightest supply figure, as measured by the important stocks-to-use ratio, in at least the last 70 years, in 1995-96.

It is not inconsistent to believe that this is the lowest inventory ratio which can, for corn, realistically be achieved. Indeed, The USDA in 1995-96 started off with a stocks-to-use figure of 3.7%, only for that to prove too tight.

Consumption vs demand

If a floor has been reached, it is buyers, rather than producers or bullish investors, who should be cursing.

For it would mean that there is 89m bushels less corn to go around this season than the market had thought. That implies that consumers will have to pay more for what is left.

Sure, there is something to the USDA's idea that a southern tilt to corn sowings this year will bring supplies from the 2011-12 corn harvest onstream unusually quickly.

But it is price which will, for instance, drive livestock farmers to switch from corn to soft red winter wheat to feeding their animals, the scenario that the USDA unveiled as the likely route to rationing.

Consumption of 2010-11 corn may prove less than expected. But demand, that's quite another thing.

By Mike Verdin

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