January 6, 2011

Corn may lead 2011 rally in US farm commodities 

Corn prices have the most potential price upside of any major US farm commodity this year amid a weak dollar, shrinking supplies and robust global demand, market analyst Richard Asplund said.

While a "huge" rally in the corn market is unlikely, prices may post "moderate" gains of 10% to 20% from last year's levels, assuming favourable US growing weather, Asplund said.

Generally, the longer-term outlook for grains, livestock and other agriculture commodities remains bullish as global economic growth boosts consumption.

"This has been a strong demand story," said Asplund, who's editor of the Commodity Research Bureau's Futures Market Service newsletter, a unit of Chicago-based Barchart.com, Inc. "That's the strongest kind of rally we have. I look for strength in grains to continue."

Rising grains costs will further punch beef, pork and dairy producers as corn rallied above US$6 a bushel. While cattle and hog prices are also expected to rise, it remains to be seen if that will be enough to offset rapidly appreciating feed costs.

Cattle and hog prices may increase by 5% to 10% this year, Asplund said, as the US economy improves and a weak dollar encourages exports.

Corn futures surged 52% last year, the largest gain among the most actively-traded agriculture contracts at CME Group in Chicago. That topped the gains in wheat (up 47%), soy (up 34%), live cattle (up 25%) and lean hogs (up 22%).

Agricultural futures also outpaced the stock market as hedge funds and other speculators sought better returns in commodities. The Dow Jones Industrial Average rose 11 % last year, while Standard & Poor's 500 Index gained 13 %.

At yesterday's (Jan 5) close, March corn futures rose 9 and a half cents to US$6.18 a bushel, down from a 29-month high of US$6.34 reached January 3.

Increasing investor demand for exchange-traded funds and other instruments linked to agricultural markets will contribute to strength in grain futures, Asplund said. At CME, agriculture trading rose to a record last year, partly on increased speculator activity.

Other analysts also expect corn will be among commodity leaders in 2011. Corn, along with soy and coffee, have potential to rise the most among about 10 commodities, Rabobank Agri Commodity Markets analysts said in a Dec. 21 report.

Record crops are probably needed to keep inventories from tightening further, Rabobank said. Favourable weather conditions "are necessary for almost all agricultural commodity markets in 2011 to rebuild inventory levels and prevent a rally in prices back to the highs of the 2007-08 commodity boom," the report said.

According to US Department of Agriculture estimates, global corn use in 2010-11 will increase 3.1 %, to 837.9 million tonnes, while stockpiles will decline 12 %, to 130 million tonnes.