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Opinion: US corn revision harmful, but not fatal

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The Lord, according to scriptures, giveth and taketh away. The US Department of Agriculture does it the other way round.

The mighty farming authority, whose crop estimates set the pace on crop markets around the world, in June revealed a big hole in domestic corn supplies. It unveiled an estimate for US corn inventories which was 290m bushels (7.4m tonnes) lower than analysts had expected.

On Thursday, it gave most of that ground back. Its forecast for this month was, at 1.71bn bushels, 300m bushels above market forecasts.

Wheat factor

There is a hideous symmetry about the revisions. As if the department had found a few boxes of farm returns lost behind the sofa since spring.

But even if the explanation were that simple, the revision does not mean that Chicago corn prices are on their way back below $3.30 a bushel, where they were before the USDA's June surprise.

Supplies of wheat, an alternative to corn for many uses, such as livestock feed, look far tighter than they were then, now the extent of the crop devastation in the former Soviet Union has become clear.

That's one reason to think that corn prices can hold on to higher ground.

Key ratio

A second is that hopes for this year's US corn crop have fallen considerably since then too.

Factoring in a yield of 160 bushels an acre, which hardly looks unreasonable given the poor harvest reports, with the new estimate for stocks at the start of 2010-11 implies that inventories will end the year at less than 1.25bn bushels – equivalent to a little over 9% of use.

That's not as low as the percentages beginning with 8, at most, that investors have been talking about, and certainly signals that a fall in prices is in order. But not to the previous levels, which were based on a ratio of more than 10%.

Corn cocktail

And, in fact, there is reason to suggest that the 2010-11 stocks-to-use figure may yet go lower still.

Analysts had worried that the fast and early US harvest would mean that some newly-reaped corn got counted as crop left over from last year.

We are not talking mega numbers. Even by September 5, the first figure available, farmers had harvested only some 6% of the crop, equivalent to less than 800m bushels. That's about 500m bushels more than they had harvested by the same time a year before.

Still, it would not take much in the way of new crop contamination to bring today's stocks figure back to earth.

Volatility ahead?

Investors were certainly right to mark down corn, and by extension its fellow grains, on Thursday. But the USDA gave reason to question, not panic.

As for answers, the value of corn will be, as ever, what buyers will pay. Export data on Thursday were promising, but they were booked under the previous thoughts for stocks.

The market may be in for some more volatility while it discovers what the new price level is.


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