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Grains rally takes another blow. But it's not floored yet

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The US has taken a big step on the route to replenishing its own, and the world's, corn and oilseed inventories, to judge by updated sowings estimates.

But it is too early to count the kernels yet. Prices will not for now fall all the way to earth.

Sure, the data on US crop sowings released on Friday by the US Department of Agriculture, show farmers worked near-miracles in getting crop planted despite dismally wet conditions.

The 97.4m acres of corn the report showed they have planted, besides being a 77-year high, was 2m acres more than investors had expected.

On the face of it, factoring in USDA assumptions on yield, and corn abandoned or cut for silage, that's equivalent to an extra 300m bushels in production terms.

Geography factor

However, investors would be wise to attach some discount, for factors which may reduce the crop merely to a large one rather than a huge one.

Growers still had roughly 3m acres of corn to plant, and more than 11m acres of soybeans, when the USDA collated its data.

It likely that not all of that will have been sown. Indeed, in Iowa alone, the top growing state, a separate USDA report earlier this week indicated that well over 550,000 acres of corn had not been seeded, of which only 200,000 acres were accounted for in Friday's report.

Besides, the detail of the report is not quite as encouraging as the headline figure, in showing a greater reliance on some states, such as Louisiana, Michigan and Texas, which typically produce below-average yields.

Acreage estimates were trimmed for some better-yielding states, such as Minnesota, besides Iowa.

Double crop penalty

For soybeans too, the data are not quite as dazzling as they first seem.

Sure, farmers intend to plant some 600,000 acres more with the oilseed than originally intended, a fillip for supply hopes.

But they are relying to an unusually large extent – 10%, 7.8m acres and the highest figure in at least 15 years - on double crop soybeans, planted as a follow-on crop from the ongoing wheat harvest.

Even assuming all these soybeans get into the ground, their shorter growing season curtails yield potential.

Weather risks

Besides, the crops still have a lot of weather to get through before making it into the barn.

A month-or-so's time is one crucial period, being the peak of pollination - a heat-sensitive process, as the low yields achieved in sweltering 2012 highlighted.

However, even if crops sail through pollination, investors will keep some risk premium to guard against the threat of frost damage, which looks more likely for a late-sown crop, likely to be harvested later than normal too.

Price outlook

New crop corn futures certainly look like they are heading to a per-bushel price beginning with a $4, and potentially a mid-range one too, to curtail the signal to farmers to put so much effort into plantings next year.

But they may be a little while to reach the bottom. The corn rally has taken another substantial blow, but it is too early to write its death certificate yet.

By Mike Verdin

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