U.S. corn stocks ratio to match lowest since Depression

WASHINGTON Wed Feb 9, 2011 1:10pm EST

WASHINGTON (Reuters) - The U.S. government made a surprisingly deep 9 percent cut in its forecast for corn stockpiles on Wednesday, projecting the tightest supply-to-useratio since the Great Depression as more of the feedgrain is used to make ethanol.

Corn prices in Chicago jumped to their highest level since July 2008 following the Agriculture Department report, which threatened to rekindle heated debate about using crops for fuel as food prices soar and big importers scramble to build up stocks in order to head off civic unrest.

Global grain supplies have been tightening for months as droughts and floods coupled with unrelenting demand for feed, food and fuel caused wheat and corn prices to more than double from last summer's lows. But traders had not expected more bullish news in Wednesday's data.

In the latest in a series of surprises from the USDA, the agency cut its estimate from the previous month for carry-over corn stocks at the end of 2010/11 crop year by over 9 percent to 675 million bushels.

It would be equivalent to just 5 percent of annual demand, equal to tight supplies in 1995/96 and barely larger than the 4.5 percent of 1936/37, during the economic chaos of the Great Depression.

"I think there's going to be enough corn for food, for feed, for fuel and for export opportunities," said Agriculture Secretary Tom Vilsack.

Joe Glauber, USDA chief economist, said in an interview that corn stocks would remain tight into 2012. Some rebuilding is likely with this year's crop "but we're obviously going to need a lot more corn acreage" in the face of strong demand.

CORN FOR FUEL

USDA said stocks would be pulled down this year as the amount of corn distilled into ethanol exceeds expectations. The agency raised its corn-for-ethanol estimate by 50 million bushels from the 4.9 billion bushels estimated in January.

The increase was attributed to record-large ethanol output in December and January and follows the Environmental Protection Agency's decision to allow up to 15 percent ethanol blended in motor fuel, up from the standard 10 percent.

Most analysts had not expected a rapid increase in higher ethanol blends due to fierce resistance from automakers and retailers who fear it could damage car engines and void warranties, despite government tests to ensure it is safe.

The clear link between U.S. ethanol -- which is now set to consume 15 percent of world corn supply -- and diminishing global crop stocks could revive the food-versus-fuel debate, which unlike the surge of 2008 has so far been largely absent this year amid mounting anxiety over food supply and inflation.

The USDA made only marginal changes in its outlook for wheat and soybean crops, as expected, but those prices also rallied as surging corn prices were likely to stoke even fiercer competition for cropland among U.S. farmers who are now beginning to make spring planting decisions.

FORWARD PRICING PROTECTS MARGINS

If USDA's estimate proves true, corn-for-ethanol usage would set a record this marketing year. Some 4.568 billion bushels was used in the previous year.

"Corn costs for many ethanol producers and other end users may also be below spot values to date as a substantial portion of this year's crop appears to have been forward priced," said USDA, suggesting that ethanol makers can turn a profit despite rising corn prices.

More corn also will be used to make high fructose corn syrup, USDA said, pointing to strong shipments of the sweetener to Mexico. An upturn in industrial production will boost demand for starch from corn, said USDA, as it allotted an additional 20 million bushels for HFCS and starch.

World corn stocks will drop by 3.5 percent, or 4.5 million tonnes, to 122.5 million tonnes, USDA said, due to smaller stockpiles in the United States and Brazil. USDA cut its estimate of Argentine corn production by 1.5 million tonnes, to 22 million tonnes, due to drought.

(Reporting by Russ Blinch, Christopher Doering, Charles Abbott and Emily Stephenson; editing by Jim Marshall)

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