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21st December, 2007

NEW YORK (AFP) - Corn prices have hit their highest levels in more than a decade, fueled by US government pressure for higher production of ethanol as an alternative power source for cars.

A falling surplus of US corn, along with robust demand for the commodity in China's fast-growing economy, have driven corn futures up by nearly double over the past year to levels not seen since July 1996.

On the Chicago Board of Trade Friday, the corn contract for March delivery closed at 4.0675 dollars per bushel.

Prices surged last week after a new estimate from the US Department of Agriculture (USDA) sharply downgrading its forecast for the 2006-2007 corn harvest, on the back of drought in parts of the midwest.

"The US is pivotal to the corn market, as it accounts for over 40 percent of global production and almost 70 percent of exports," said Helen Henton, head of commodity research at Standard Chartered Bank.

"While the US crop is still the third highest on record, and should exceed domestic needs, a reduced surplus will be available for export," she said in a research note.

Despite the high prices, there is no sign of demand flagging. China's growing affluence has seen dietary demand for corn-reared animals swell, and China is set to become a grain importer in the coming years, Henton noted.

And ethanol now consumes 20 percent of the US corn harvest, compared to six percent in 2000, according to USDA estimates.

In his State of the Union speech Tuesday, US President George W. Bush is expected to issue a new call for higher output of corn-derived ethanol to fuel US automobiles and so lessen the country's reliance on imported petroleum.

In a speech this month, Agriculture Secretary Mike Johanns said that six years ago, the United States had 54 ethanol plants capable of pumping out less than two billion gallons (7.6 billion liters) a year.

Today, more than 100 plants now produce a combined total of more than five billion gallons per year.

"More than 70 additional plants are under construction, expected to increase our production capacity by eight billion gallons. That, ladies and gentlemen, is a lot of corn," Johanns said.

The United States could increase imports of ethanol from Brazil to fulfill the increasing demand, but is constrained by import tariffs designed to protect US corn farmers.

The squeeze is laying bare tension over how much corn should go for food, and how much for fuel.

In Mexico, trades unions plan to lead mass protests on January 31 against steep rises in the price of corn tortillas, which have prompted the government to impose price caps on the country's staple food.

Allendale market analyst Joe Victor said that world stocks of corn are "historically tight" at 86 million tonnes now, compared to a previous low of 89 million in 1983.

"The market is very much aware that there are very few supplies out there, coming at a time when the Bush administration is going to put more pressure on the corn market to produce more ethanol," he said.

"We are already seeing signs of economic rationing. Especially in the poultry industry, we are not putting as many eggs into the incubators," Victor added.

"We are already seeing US companies going elsewhere, especially Argentina, to find supplies."

Analysts believe US farmers will scale back their production of other crops like wheat and cotton and plant 10 percent more corn this year, which should help calm the market.

"It will be hard for prices to go above five dollars in the next few months," said Dax Wedemeyer, a market analyst at US Commodities. "At some point, ethanol becomes less profitable."

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