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Shrinking U.S. grain supply shocks market, prices surge

U.S. corn and wheat stockpiles shrank far more than expected this summer, the U.S. government reported on Friday, reigniting a rally in grain prices on fears that strong demand and drought-decimated crops will keep markets tight.

Corn futures surged nearly six per cent on the Chicago Board of Trade after the U.S. Department of Agriculture reported corn stocks on Sept. 1 were below one billion bushels for the first time in eight years.

Wheat futures rose more than five per cent, topping $9 a bushel after the data showed stockpiles were seven per cent less than forecast (all figures US$).

The ending-stock figures showed that record-high corn prices during the quarter had failed to put as big a dent in demand as analysts expected, suggesting that prices may need to rise higher still in the coming months to ration demand amid heightened competition for food, livestock feed and ethanol.

The data are likely to revive global concerns over rising food prices and supply security, and may renew calls to ease the U.S. ethanol mandate that many blame for driving up prices.

While consumers have been bracing for higher prices after the worst U.S. drought in half a century withered corn and soybean crops this summer, Friday’s data shows the margin of error in supplies is even thinner than many feared.

"Down to the rind"

"We may be getting down to the rind of the watermelon on the corn and wheat," said Jim Gerlach of A/C Trading in Fowler, Indiana.

After weeks of easing prices, the tide may be changing, he said: "Personally, I’m moving toward a buy weakness opposed to selling strength."

USDA’s survey of farmers and warehouses showed 988 million bushels of corn on hand — 11 per cent less than expected — on Sept. 1. That date is the start of the corn marketing year and the traditional low point for supplies, as it comes before this year’s harvest gets added to the stockpiles.

Wheat stocks of 2.1 billion bushels were seven per cent smaller than traders expected. Soybean stocks were much larger than expected.

It was the third straight year that the USDA’s September inventory report surprised traders. The unexpectedly low corn number is all the more shocking as many analysts were bracing for a higher figure, artificially inflated by the unusually early harvest that is bringing "new crop" supply into inventories.

"Corn again"

But supplies shrank. Even with corn prices soaring to $8 per bushel earlier this year, demand remained heavy from exporters, livestock farmers, ethanol plants and food makers.

Corn consumption from June-August was 15 per cent smaller than the same period a year ago, yet not enough to prevent low stocks. USDA chief economist Joe Glauber said the corn and wheat stocks figures showed demand was larger than expected, especially for livestock feed.

"We’re going to hear talk that we’re going to have to do a better job of rationing in the feed sector. That’s not easy to do," said Don Roose, president of U.S. Commodities.

Corn futures were limit up — at the daily ceiling — at $7.56-1/2 a bushel in Chicago at midday. "Synthetic" bids, from the options market, indicated corn was worth up to $7.60 a bushel. Wheat futures ended the day at $8.99-1/2 a bushel, up five per cent. Soybeans closed at $15.98, up 1.7 per cent.

Wheat consumption was up by 27 per cent for June-August compared to one year ago, USDA said. Agricultural economist Darrel Good of the University of Illinois estimated 435 million bushels of wheat, twice the usual amount, was fed to livestock in the three-month period.

"Wheat is corn again," said Jason Kitt of The Linn Group.

Livestock feeders use wheat as feed when corn is scarce and expensive. While U.S. corn production is down for the third year in a row, growers harvested 2.27 billion bushels of wheat this year, the largest crop in eight years.

Ethanol in focus?

Six key groups of corn users in Japan, the largest importer of the coarse grain, asked Washington to consider a two-year waiver of the U.S. requirement to mix ethanol in gasoline. They said high corn prices put "great pressure" on Japanese industries and could cut U.S. sales permanently.

U.S. food producers also hope they can reduce pressure on corn supplies by convincing the U.S. government to relax the ethanol mandate. Grain supplies data could play a part in the decision, possible in November.

Soybean stockpiles totaled 169 million bushels at the start of this marketing year, much larger than expected, despite heavy consumption late in the 2011-12 marketing year.

USDA also revised its estimate of the 2011 soybean crop to 3.09 billion bushels, up one per cent. The 37 million-bushel increase was roughly the same as the difference between the stockpile figure and trade expectations for stocks.

— Reporting for Reuters by Charles Abbott and Emily Stephenson in Washington, D.C.

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