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Corn find deals blow to grains rally. But not a fatal one

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The US has delivered a blow to the bull market in grains, but not, on its own, a fatal one.

America's discovery of more than 200m bushels (5.2m tonnes) of corn in its attic certainly warranted a large slump in prices. That went a long way to reducing sellers' power over supplies.

But buyers should not think that they now have things all their own way.

Data puzzle

For a start, the data are difficult to swallow at face value.

The US Department of Agriculture's quarterly stocks reports have a reputation of throwing up puzzles, and this one is no different.

This time, the mystery is why estimates for both corn and wheat inventories were so high.

The immediate take on Friday's figures was that high corn prices had prompted livestock feeders to cut back heavily on purchases, rather than that supplies of the grain having been bigger than had been thought. The data imply a drop in feed use to a 16-year low of 4.8bn bushels in 2010-11, according to the University of Illinois.

However, even observers not surprised by such heavy rationing should question where the demand has gone. For it does not appear to have switched to wheat, the likely candidate as alternative feed source. Stocks of wheat were bigger than expected at the start of this month too - and this despite the US downgrading its 2011 harvest.

Last year, investors discovered surprisingly large inventories were not so bearish after all, turning out to be a knock-on effect of an early harvest.

Corn consumers would be wise this time too to keep the champagne on ice until it is clear extra stocks really mean extra supplies.

Still thin

And even if supplies are less tight, an extra 200m bushels of corn will not solve the grain's supply squeeze on its own. It is equivalent to less than six days' demand.

The stocks-to-use ratio for US corn in 2010-11 stays below a thin 10% even if factoring the larger inventory into official data, and assuming the extra 200m bushels reflects destroyed demand, so cutting that from the use figure too.

And the ratio remains under 7%, a 16-year low, at the close of 2011-12, even after adding in the extra 200m bushels to the year-end stocks number.

Elastic corn?

Besides, what the data, at face value, appear to show that corn consumption is more sensitive to price than had been thought.

That, perhaps, thanks to greater industrial use means buyers can turn taps off quicker than in the past.

This implies the taps can be switched on quickly too (macro-economic factors allowing). And if cheaper corn brings buyers back to the table, prices of the grain would find a bit of spring put back in their step.


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