The United States, the world's top grain exporter, runs the risk of depleting its corn supplies before the autumn harvest unless demand is curbed.
Stocks are at their tightest since the 1930s, but demand from the ethanol, livestock and export sectors has not flinched despite corn prices rising to a record high last week.
The U.S. Department of Agriculture's premise that supplies can be preserved by feeding cattle with wheat and corn that is harvested early in the South might be flawed, analysts said.
The southern harvest gets under way in August, while cutting of the corn crop in the Midwest grain belt
begins in earnest in late September.
"I'm not convinced we can slow down demand for corn by feeding livestock a lot of wheat," Darrel Good, an agricultural economist at the University of Illinois at Urbana-Champaign said. "Wheat prices are also quite high."
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He, and other grains analysts, said the remedy may lie with prices having to go even higher to curb demand for corn, which is largely processed into animal fodder and ethanol.
Corn futures Cc1 at the Chicago Board of Trade have surged 115 percent from a year ago, and 14 percent since the USDA's March 31 report, which pegged quarterly corn stocks as of March 1, at well below trade estimates.
Analysts said the price of corn could go higher as oil prices, near $113 per barrel on Friday, were expected to maintain profit margins in the ethanol arena and keep demandfor corn brisk.
The livestock sector has increased its intake of distiller's dried grains (DDGs) as a substitute for corn, but the industry is profitable enough to retain its appetite for corn due to record-high prices for cattle and hogs this year.
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DRAWING A LINE IN THE SAND
The USDA's supply-demand report on Friday kept its estimate of U.S. corn ending stocks unchanged at 675 million bushels -- which was 15 percent above a forecast by analysts.
Analysts had expected a lower number because the USDA's estimate of quarterly corn stocks as of March 1, came in at 6.5 billion bushels -- 2.5 percent below trade estimates.
Analysts contacted on Friday said they now expected USDA to likely stick with its ending stocks estimate of 675 million bushels through the end of the marketing year.
"It has drawn a line in the stand to say this is where endings stocks will be," said grains analyst Bill Nelson of Doane Agriculture Services in St. Louis, Missouri.
He said the USDA has now shifted the burden of ensuring sufficient corn stocks in the United States to the market.
"I think there has to be deeper rationing (of demand)," he said, implying the need for higher prices.
But high prices for cattle and hogs can absorb some of the higher prices for livestock feeders, he said, adding, "Producers had bought supplies when prices were lower."
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Agricultural lender Rabobank said in a note that it did not expect the USDA to revise down its estimate of ending stocks.
"In our view ... this signifies the USDA has simply reached the lowest level of corn stocks they are willing to report."
'EXTREMELY LOW SUPPLIES IN SOME STATES'
Grains analyst Dan Basse of AgResource Co in Chicago said there has been no evidence of any sizable rationing of demand so far, adding that concerns over nutritional value could thwart any big shift in feed demand from corn to wheat.
He said there is a possibility that some Midwestern states could run extremely low in corn supplies by summer as they wait for supplies from the harvest that begins late in September.
Some states in the eastern Corn Belt harvested a crop with poor yields last year due to damage from incessant rains.
Investment bank Goldman Sachs said in a note on Friday that it was expecting corn stocks to tighten further on continued strong demand for feed and ethanol production.
"As a result, we forecast higher prices in the near term," it said. The bank last week raised the price of corn to hit $8.60 per bushel in three months.
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Source: Reuters