Corn to deflect export demand on low stocks

* Higher corn prices needed to curb demand

 * USDA pegs U.S. corn stocks at lowest in 15 years

 * Higher corn prices could toughen inflation battle

 * Demand would shift to Australian feed wheat

 By K.T. Arasu

 CHICAGO, Feb 13 (Reuters) - Corn Cc1, back in the
driver's seat, is in the unique position of having to fend off
export demand to ensure that the United States does not run out
of supplies before the next harvest in autumn.

 To achieve this, without instituting export restrictions as
some countries did during the food crisis in 2008, the markets
will have to rally prices even further from where they are now
-- the highest in 2-1/2 years.

 This, however, could exacerbate efforts by countries such
as China and India to rein in inflation fueled in large part by
the surge in prices for agricultural commodities.

 The process of curbing exports, known in industry parlance
as demand rationing, will begin in earnest this week after the
U.S. government last Wednesday slashed its estimate of corn
stocks by 9 percent from January to the smallest in 15 years.

 The U.S. Department of Agriculture also said the corn
stocks-to-use ratio, which measures corn supply and demand, was
the tightest since the Great Depression of the 1930s.

 The drop in corn stocks was fueled by an increase in the
use of the grain to produce ethanol, which accounted for about
40 percent of the entire corn crop in the United States.

 Analysts said that based on the current price of crude oil
and corn, the ethanol sector's demand for corn would not be
dented until corn futures rise to $8 per bushel.

 At that price, analysts said livestock producers in some
parts of the world may have to cull herds to downsize
operations.

 'WE HAVE ONLY SO MUCH CORN'

 "The (corn) markets needs to do a better job of rationing
demand, and that means higher prices," said grains analyst
Shawn McCambridge of Prudential Financial in Chicago.

 "We only have so much corn in the country," he said,
alluding to the USDA's estimate that corn stockpiles will fall
to an estimated 675 million bushels on Aug. 31 -- the end of
the marketing year -- down 60 percent from a year ago.

 High prices for corn are also essential to ensure enough of
the crop is planted this spring -- versus soybeans -- to build
back buffer stocks in the United States, the world's top grower
and exporter of corn.

 "The price relationships (between corn and soybeans) have
not narrowed enough to favor corn," McCambridge said.

 The price ratio between CBOT November 2011 soybean futures
SX1 and CBOT December 2011 corn futures CZ1  -- the first
contracts to fully reflect prices for the new crop -- was at
around 2.2:1 on Friday, a level that is considered neutral.

 To entice farmers to dedicate more of their land to corn,
the ratio has to improve to at least 2.4:1, analysts said.

 Based on the latest data from the USDA, export demand for
corn was not yet being curbed by higher prices, which crossed
$7 per bushel on Thursday for the first time since mid-2008,
after rising 52 pct in 2010.

 Thursday's USDA weekly report showed that U.S. corn sales
topped 1 million tonnes for a second straight week last week.

 "There would be panic if we run out of stocks," said grains
analyst Bill Nelson of Doane Advisory Services in St. Louis,
Missouri. "But it won't get to that."

 MEXICO MAY RAISE CORN IMPORTS

 Analysts said countries that traditionally depended on the
United States for feed would turn their attention to supplies
of feed wheat in Australia, where a large portion of its wheat
crop was downgraded to feed by excessive rain.

 Demand would also shift to South America. Argentina, the
world's No. 2 corn exporter, is forecast by the USDA to export
14.50 million tonnes, and Brazil 7 million tonnes.

 Nelson said there may be increased demand for corn from
Mexico, where a cold snap had damaged the crop.

 "There are some estimates that losses could be as high as 4
million tonnes of corn," he said, adding that Mexico was likely
to continue seeking U.S. corn because of low rail and truck
transportation costs to ship the grain.

 Mexican agriculture officials on Friday said all of the
corn crop in the northwestern part of the country had been
damaged by frost. The state accounts for 20 percent of Mexican
output.

 Settlement prices for CBOT grains and oilseed complex:

                          LAST      NET    PCT     YTD

                                    CHG    CHG     CHG
CBOT corn       Cc1      706.50     8.00   1.2%   12.3%
CBOT soy        Sc1     1416.00   -17.00  -1.2%    1.6%
CBOT meal       SMc1     378.10    -4.40  -1.2%    2.1%
CBOT soyoil     BOc1      58.49    -0.55  -0.9%    1.3%
CBOT wheat      Wc1      867.00     4.25   0.5%    9.2%
 (Additional reporting by Mica Rosenberg in Mexico City;
editing by Maureen Bavdek)

(Source: http://af.reuters.com/article/energyOilNews/idAFN1325123020110213)