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Analysts say world grain demand to ride out recession

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“No matter whether China’s economy grew by single digit of faster growth, meat consumption is still growing, some meat products, like beef, are still in short supply”

World demand for grain should prove resilient in the face of a global recession and a sharp drop in prices could curb plantings and cut supply, opening the door to a rebound in some markets.

The cost of corn has halved in the last few months and wheat has fallen even more steeply, taking some of the heat out of food price inflation, although there may be a time lag before the trend is fully reflected on the supermarket shelf.

“I think the current sharp fall in prices is going to have a pretty quick response in terms of the supply side,” said Sudakshina Unnikrishnan at Barclays Capital in London.

“I don’t think current prices, especially the lows we have seen over the last couple of weeks, are really sustainable. Whenever a rally does take place it is going to be pretty strong,” she added.

Rising costs of inputs, particularly fertilizers, could dissuade farmers from planting grains with margins squeezed by the drop in prices.

“The potential loser could be corn. It is the most fertilizer-intensive among the grains,” Unnikrishnan said.

Art Bunting, who farms about 2,000 acres around Dwight, Illinois with his two brothers, said the drop in prices was likely to have an impact on planting decisions.

“We are just barely at cost of production right now on some of this corn. With the high inputs, it is going to get expensive to put corn in,” he said.

“There might be a possibility that farmers plant less wheat, because they current do face pressure on their margin outlook, driven by the extreme price decreases we have seen over the last four or five weeks,” said Dirk Jan Kennes, an analyst with Rabobank in Utrecht, the Netherlands.

Chinese demand

Weaker Chinese demand has helped to drive sharp falls in the prices of some commodities, particularly industrial metals, but the outlook is much more robust for grains.

Meat demand is growing in China, despite an economic slowdown, resulting in more demand for feed grains such as corn.

“I don’t see any impact for Chinese grain demand (from the global financial crisis),” said He Xuegong, chief analyst with Beijing Orient Agribusiness Consultant Ltd.

“No matter whether China’s economy grew by single digit of faster growth, meat consumption is still growing, some meat products, like beef, are still in short supply,” He said.

Stock rebuilding in China should also help maintain demand.

“One of the things that may happen as a result of lower prices is that the (Chinese) government may replenish some of their grain stocks,” said Brady Sidwell, an analyst with Rabobank in Hong Kong.

Some consumers, particularly in developing countries, may, however, turn away from meat as the economic crisis bites.

James Dunsterville, analyst at Geneva-based Agrinews, said an economic slowdown may be more bearish for demand for corn than wheat which is less reliant on demand from the feed sector.

“Food is the last thing a family deprives itself of but the housewife will go for pasta and bread before she goes for meat,” he said.

The drop in prices has made grain more affordable for importers although the economic crisis could eventually make it more difficult for some countries to borrow money to finance their purchases, said Andree Defois, an analyst at France’s Strategie Grains.

Food price inflation is also starting to slow.

“A combination of lower food and fuel prices has helped to curb the whole inflationary story. In terms of food prices, however, there is always a lag between the prices of the underlying (commodities) and retail prices reflecting that change,” Unnikrishnan of Barclays Capital said.

The U. S. Department of Agriculture forecast last month that U. S. food prices were expected to surge 5.5 per cent in 2008, their largest increase in two decades, and rise by 4.5 per cent in 2009.

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