July 5, 2012

 

Asian corn importers uncertain as US drought kill crops

 

 

Asian corn importers, who buy up to half of the grain's global export supplies, find themselves caught unawares by prices that are at 10-month high due to the worsening US drought.

 

Asian buyers, including top world importer Japan, had expected the corn market to soften on hopes of a record harvest in top exporter the United States.

 

But a severe drought in the US grain belt is curbing yields with every passing day, adding one-third to the value of corn since mid-June and raising fears of food inflation.

 

The region's animal feed makers, who are running on thin stocks, are likely to hit the market in the next few weeks and fears of tightening supply could prompt importers to book larger volumes from the United States, traders and analysts said.

 

"Higher prices don't necessarily trigger buying as you need a combination of rising prices and dwindling supplies," said Abah Ofon, an analyst at Standard Chartered Bank in Singapore. "That panic has not started as yet but I think it is likely to start."

 

Relentless heat in the key US corn- and soy-growing areas drove benchmark Chicago corn futures higher on Tuesday (July 3) in their biggest eight-day advance in 3-1/2 years.

 

The heat and drought are likely to have sliced another 2.5% off this year's US corn crop, threatening to reduce what would have been a record harvest to a drought-stunted intake, according to a Reuters poll.

 

Traders said most buyers in Asia are covered only until September with the last quarter largely open, even for Japan and South Korea, which together buy nearly 23 million tonnes, or almost a quarter of what is shipped across the world.

 

"Consumers are not covered as most of them didn't price in the weather risk. They will be in trouble if this rally continues," said one trader who was not willing to be identified, in line with his company's policy.

 

In recent months, millers in Japan, South Korea and Taiwan booked US and South American cargoes, locking in freight and premiums as everyone was bearish on futures prices. "It has turned the other way around, premiums have tanked and futures have rallied," said another trader.

 

Asia's physical corn prices have also moved in step with surging US corn futures.

 

Argentine corn is quoted around US$300 to US$305 a tonne, including cost and freight, in Southeast Asia for September shipment, while US corn is being offered at US$325 to US$330 a tonne, with prices having risen US$25 to US$30 in the last 2 weeks.

 

Feed millers have been slowing purchases, hoping for the market to cool down, one veteran Japanese trader said.

 

"They might not have a choice but to pay higher prices if futures keep on going up and up," he said by phone from Tokyo.

 

With no relief in sight from this week's heat wave many analysts see more downside ahead, potentially shrinking the crop to less than the record 13.09 billion bushels harvested in 2009.

 

US drought follows similar dryness that shrunk soy and corn production in rival supplier South America this year, cutting supplies and forcing importers to rely more on grain from the United States. As a result, US corn stocks on August 31 are forecast to be the lowest in at least 16 years.

 

Still, some analysts believe rising prices will ultimately curb demand, limiting the upside in US corn futures, thanks to global economic uncertainty.

 

Soaring US corn prices kept pressure on demand as US weekly export sales fell 23%, missing trade forecasts, data from the US Department of Agriculture showed last week.

 

"This year ethanol demand is going to be quite weak as margins are not great," said one Melbourne-based analyst. "The demand side of coarse grains will be weaker."