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Corn Joins Bear Market as Drought-Driven Rally Ends

April 3, 2013
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April 3 (Bloomberg) -- Nine months after a U.S. drought sparked a surge in global crop prices, corn has joined soybeans and wheat in a bear-market slump as demand slows and farmers prepare to boost output in 2013.

Corn futures in Chicago plunged 13 percent since the U.S. Department of Agriculture said March 28 that inventories were bigger than analysts forecast and that farmers will plant the most acres this year since 1936. Corn, soybeans and wheat, the biggest U.S. crops along with hay, have tumbled into bear markets with drops of more than 20 percent from 2012 highs.

Exports of corn from the U.S., the world’s largest grower, are at a 41-year low, while high grain costs last year forced beef producers including Cargill Inc. to close plants and ethanol makers such as Valero Energy Corp. to shutter distilleries. South American farmers are adding to supply with record harvests, and global food prices tracked by the United Nations dropped for five straight months through February.

"Corn is the basis for where we start in looking at cost of production for food," said John Nalivka, a former USDA economist and the president of Sterling Marketing Inc., an agricultural economic research and advisory company in Vale, Oregon. "Right now, whether it be supply driven or demand driven, our food prices are not going to be as high as it appeared they were going to be nine months ago."

The Standard & Poor’s Agriculture Index of eight commodities has declined 21 percent from a peak on July 20, including a 28 percent slump in wheat, which entered a bear market in early January. Soybeans, down 22 percent from a closing high in September, first reached a bear market in November. Coffee and sugar also are in bear markets.

Inventory Surprise

While the USDA forecast in February that domestic corn production would surge this year by 35 percent to a record 14.53 billion bushels, prices on the Chicago Board of Trade reached a seven-week high on March 27 because of concern that inventories would get too low before the harvest in September.

On March 28, the USDA estimated March 1 corn inventories at 5.399 billion bushels, 8.1 percent more than the 4.995 billion analysts predicted in a Bloomberg survey and a sign that demand had slowed. The government also said U.S. farmers will sow 97.282 million acres.

That day, prices fell by the 40-cent exchange limit. The next session, they plunged 7.6 percent, the biggest drop for a most-active contract since 1988. The two-session slide of 13 percent was the biggest since before 1960, erasing $4.8 billion in value based on the March 1 inventories.

‘Game-Changing’

"The larger corn supply was a game-changing event and shifted market psychology from fears of shortages to worries about excesses," said Roy Huckabay, an executive vice president for the Linn Group in Chicago. "The markets are pricing in bigger supplies."

Corn futures fell 0.6 percent today to $6.3675 a bushel as of 11:51 a.m. on the CBOT, while soybeans declined 1.2 percent to $13.775 a bushel. Wheat climbed 2 percent to $6.845 a bushel.

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