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US deals severe, but not fatal, blow to grain price rally

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US agriculture officials have knocked another nail or two into the coffin of the grains rally.

But they have not smashed a stake into its heart.

Their finding that corn, soybean and wheat inventories, as of March 1, were larger than the trade had expected, significantly so in the case of corn and soybeans, was a big relief to the likes of livestock feeders and ethanol plants.

They should certainly be counting on lower altitude feed costs.

But it will need more evidence to drag prices all the way to earth.

Still thin

After all, stocks are still thin. At 5.39bn bushels, corn inventories as of March 1 were historically low, and nearly 20% below their average of the previous six years.

That warrants some premium.

And there is the potential for quite a strong pick-up in demand if prices fall too far.

Ethanol production margins were already firmly positive ahead of data, starting the week at $0.14 a gallon, according to Morgan Stanley.

They look to have gotten wider since. Corn prices have this week fallen further than ethanol prices, and would have underperformed further were it not for the floor provided by the daily limit on futures moves.

Resilient feed demand?

Livestock producers have the potential to mop up more grain too.

That is not so much the case with cattle feeders, who have responded to the sting of higher grain prices and, given the lengthy production cycle, will take some time to rebuild herds.

But poultry farms don't appear to be doing much to cut back on feed use. Data on Wednesday showed hatcheries placing 200m broiler-type eggs in incubators last week, up 2% year on year.

As for hog producers, separate USDA statistics on Thursday showed the US hog herd rising by 1% year on year, a little faster than analysts had expected but, combined with a drop in sow slaughter this year and a sharp rise in sow prices, evidence that farms are preparing to meet lower feed prices with higher demand.

This year's prospects

Nor are the US plantings data quite as negative for corn prices as they might seem.

Sure, sowings will rise a little, to the highest since 1936.

But the increases are coming in states such as Louisiana, North Dakota and Texas states which (ignoring last year's drought-affected results) tend to produce below average yields.

Farmers in some bigger-yielding states, such as Illinois, Indiana and Michigan, are lowering corn plantings in favour of soybeans.

And in some other major producing states, such as Iowa and Nebraska, most farms are still suffering from the drought which has left the US hard red winter wheat crop is in historically poor condition too.

Transfer of power

Sure, a stack of pricing power transferred from sellers to buyers on Thursday. Corn looks unlikely to see $7 a bushel again for a while.

But as yet consumers do not hold all the cards.

Stocks reports have a habit of surprising. The last one, in January, sent prices soaring.

It is not impossible that by the time of the next one, in three months' time, buyers may have found grain prices holding up better than they had hoped.

By Mike Verdin

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