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Opinion: investors right to jump back into corn

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A crop's price does not just reflect how much of it hits the silo. How long it stays there is important too.

Wednesday's US Department of Agriculture crop briefing might at first have looked a poor one for Chicago corn prices. What, with production raised by 471m bushels, it appeared to have provided plenty for bear investors to feed on.

As Dan Roose, at US Commodities, said: "If you look at the report, the [corn] yield is price negative. The acres are price negative. I would call the [report] corn negative."

In fact, investors' look right to have pulled corn out of an early slide.

Fuel for thought

Corn's saviour is its reviving popularity.

At home, ethanol plants are now seen on course to process 4.2bn bushels of the stuff in 2009-10, up 38% in two years. And this despite lower oil prices.

Abroad, foreign purchases are pegged at 2.1bn bushels, recovering from a recession-caused dip more than twice as fast as the USDA had previously estimated.

Demand for corn will still outweigh this year's harvest. So the amount of corn left sitting around in silos will not be much more than traders had expected.

Close fit

Indeed, on a stocks-to-use basis, a key measure of market tightness, US corn supplies still look pretty snug, at 12.6% in a year's time.

That is only 0.2 percentage points higher than in last month's report, when corn prices were 8% higher than at today's low point of $3.19 a bushel.

Sure, inventories at these levels do not mean corn is out of the woods, and on its way back above $7 a bushel. The stocks-to-use ratio was even tighter in 2003-04, when $3.19 a bushel was about as high as prices ever got.

After all, corn's current price includes some premium to reflect the US crop's tardiness which has put it on track for a late harvest, leaving it vulnerable to weather damage. This premium will erode, assuming conditions stay benign.

But Wednesday's report has at least given investors cause to hold on and find out.


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