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Opinion: corn trade shouldn't overegg China hopes

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Woe betide US corn prices if the Chinese imports which have sent prices soaring turn out to be a flash in the pan.

The market is right to pay attention. Getting the world's second ranked corn consumer on the trade roster could make a huge difference to the market's dynamics.

But China has only dipped a toe into the import market so far, buying a modest 115,000 tonnes. And even those imports may never reach Chinese mills, if market speculation is to be believed.

Tight market

Sure, prices could be in for more gains if China wades in above the knees.

The US market is looser than it was a season ago, when corn stocks as a proportion of use – a key measure of the supply tightness which has a big impact on prices – fell below 14%.

But even the stocks-to-use ratio of 14.7% expected for 2009-10 is tight by historical standards. A decade ago, for instance, it was 18%, which is itself hardly generous coverage.

It wouldn't take much in the way of extra US exports to persuade buyers to get their purchases in, and rally the market.

Price incentive

But what if China doesn't?

Its purchase comes at a sensitive time - just when farmers are making their final decisions on plantings for this year's crop.

Even with prices at the six-month lows hit earlier this week, growers were expected to raise sowings some 1-2m acres beyond the 88.8m acres on the cards last month.

Higher prices still, combined with the current near-ideal planting weather, could make corn acreages even more generous.

Supply vs demand

That could unwind US corn tightness by quite a few notches.

Factor in 2009-10 yields – a season slow off the mark for plantings and harvesting – and an extra 1.5m acres would take the total US corn harvest some 650m bushels (16.4m tonnes) higher than a year before, assuming an average 8% loss rate.

It will take much more than the extra 160m bushels (4m tonnes) or so in domestic consumption that Goldman Sachs was talking about earlier in the forecasting season to lap that lot up.

Yet it doesn't take heroic yield or planting assumptions to take the rise this year's production much higher still.

Historical high

Indeed, bar crop disasters, investors may need Chinese imports in some force to keep America's corn market from getting pretty floppy.

For China to ship in even more than the 4.25m tonnes (167m bushels) it bought abroad in 1994-95 - the most it has imported in the last half a century.

That's possible, when the country is facing such high domestic prices. But investors, and growers, may be wise not to bet the farm.

China sure trumps Spain in financial markets.

By Mike Verdin

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