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College of Food, Agricultural, and Environmental Sciences

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Markets Watching Tight Supplies, Question Demand Strength

June 30, 2011

COLUMBUS, Ohio -- Volatility has been used to describe the grain markets with increasing frequency in recent years, and an Ohio State University agricultural economist expects the trend to continue throughout 2011.

The corn acreage estimates included in the U.S. Department of Agriculture's June World Agricultural Supply Demand Estimate, or WASDE, report made clear that later-season reports will be very important -- especially because the market is so focused on supply issues at this point in the growing season, said Carl Zulauf, a professor in the Department of Agricultural, Environmental and Development Economics.

The June report estimates a reduction in planted corn acres by 1.5 million, compared with preseason prospective planting reports. It also projects a reduction in harvested corn acres by another 400,000 because of flooding.

"But those are guesses by USDA," Zulauf said. "I think they're the best guesses anyone can have, but there's always the question of 'How accurate is the guess?'"

The next round of USDA crop production and supply and demand reports will be available July 12, and the June 30 acreage report will improve the accuracy of the guess. By that time, Zulauf said the USDA will have more information because it is later in the growing season and the effects of weather and other growing season factors on yields will be more apparent -- especially in corn and wheat.

Zulauf said that while supply is the biggest concern in the market today, demand issues could be the main story of the year.

"The markets have become increasingly interested in trying to assess the impact of high prices on demand," he said. "There is some evidence that these prices are, in fact, curtailing demand, but the question is, 'How much?'"

Considering the adage that "the best cure for high prices is high prices," Zulauf said the story of 2011 could end up being the proof of that tried trader wisdom. Adding to those concerns are evolving large-scale economic issues, including the strength of the U.S. economy.

"It sure looks like our economy growth is slowing, but will the U.S. actually go into a double-dip recession? Time will tell," Zulauf said.

Global economic issues, including debt situations in European nations such as Greece and China's efforts to slow inflation in its economy, also weigh on market mentality, he said.

"The supply uncertainty is dominating the markets right now. But, the market is also very much trying to assess the consequences of high prices on demand, and of the macroeconomic issues on the market in general."

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Author(s): 
Andy Vance
Source(s): 
Carl Zulauf