March 8, 2012

Drought constricts US corn supply

Shrinking corn stockpiles to a five-year low were brought about by droughts from Mexico to Argentina, raising the prospect of a bull market before US farmers start reaping the biggest crop ever.

Global reserves will drop 4.2% to 123.43 million tonnes by October 1, according to the average of 21 analyst estimates compiled by Bloomberg. That's equal to 52 days of consumption, the fewest since 1974. Goldman Sachs Group Inc. expects prices to rise 9.6% to US$7 a bushel before the US harvest starts in September, 21% above the one-year closing low reached on the Chicago Board of Trade in December.

Prices fell 16% in the last four months of 2011 as the USDA predicted Brazil and Argentina, accounting for almost 10% of global supply, would produce their biggest crops ever. Futures then rallied as drought spread across Central and South America, spurring the USDA to cut its forecasts twice in as many months. While prices may keep rising for now, analysts anticipate declines by the end of the year as US growers harvest the most acres planted since at least 1944.

"There is no doubt that crops in South America were hurt by the hot, dry weather and that means more demand for US supplies," said Alberto Alvarez, the managing director of Chicago-based grains brokerage Fintec Group Inc. "There is an imminent explosion in corn prices."