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Opinion: corn rally more than a one-day wonder

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Beancounters at the US Department of Agriculture had a solution to one corn question.

The 300m extra bushels of US corn that they discovered last week were created, apparently, in part by a substitution effect, the early harvest allowing farmers to use up a stack of this year's crop instead of last year's.

However, the department, in its barrage of US crop downgrades, posed another, even bigger, query. How high will corn prices go?

Their close at the maximum Chicago allows on Friday does not necessarily mean in itself that they will rally much further. Just as their limit down finish a week ago did not herald a collapse.

But the tighter fundamentals of world corn supplies signal that it may be difficult for some while for prices, per bushel, to return to anything beginning with a $4.

Tight supplies

The USDA certainly gave the corn pipeline quite a pinch. Just look at stocks-to-use ratios, which in comparing supplies with demand, show where the balance of power lies between buyers and sellers.

For America itself, the world's biggest corn producer, the ratio tightened from a snug 8.3% to a claustrophobic 6.7%, the lowest for 15 years.

The global picture appears less restrictive, with stocks at 15.8% of use. But that is still tight by historical standards, and the lowest figure in recent times bar 2006-07 – in the run up to the last spike.

Further downgrades?

And it's not easy to see a painless way of easing the squeeze.

Major exporters don't look like providing a solution for now. The crop in the US, the top corn shipper too, may be trimmed further yet.

It is not impossible that the USDA, which aims to ease volatility in crop markets, even in delivering the huge blow to American yield hopes that it did, pulled some punches on Friday. The harvest is, after all, not half way through.

Indeed, historically, yield cuts in an October USDA crop report usually herald further downgrades.

Southern comfort?

And South America, the next biggest exporting region, is not likely to pick up much slack.

Sure, recent rains have lifted hopes for the crop in Argentina, the second-ranked exporter of the grain, ahead of Brazil.

But that's not enough to make much of an impact in global terms. Argentina and neighbouring Brazil are between them expected to account for 19.1% of total shipments from the big three, exactly the same as in 2009-10.

There's good reason to question whether they will manage even that. There are months to go before harvest – during which the ongoing La Nina weather pattern may well, to judge by past form, take a tithe.

Ration booked

It looks like it will be very much down to demand to limit corn prices - for the market to rise until the buyers recoil.

But if world consumption is to rise as much in 2010-11 as the USDA believes - by 25m tonnes, the same as Argentina's production – then there may not be much immediate relief for the market from this direction either.

Sure, the USDA may well prove overambitious on this score. Higher corn prices will prompt livestock farmers, for instance, to look at substitute feeds.

Yet with alternatives such as wheat also racing, there is a limit to the extent that corn prices will be weakened by a shift demand to other crops.

The ball looks being in the farmers' court for some while.

By Mike Verdin

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