New York, 3 January 2011

U.S. grain markets enter the New Year on an ebullient note amid concerns over a tightening of global supplies and expectations for commodities-juggernaut China to keep demand high to feed its growing affluence.

Factors like the decimation of Russian grain output by drought, excessive rains downgrading much of the Australian wheat crop to feed quality, and dry weather in Argentine corn and soy areas were pivotal in rallying grain prices to new highs in 2010.

These, coupled with investment money expected to flow into grain markets in 2011, when global economic growth is likely to pick up its pace of recovery from the recession of two years ago, are expected to support grain prices, analysts said.

Many analysts are confident that price gains in 2011 could eclipse the surge in 2008 when corn, soybean and wheat futures at the Chicago Board of Trade hit record highs, as the first wave of fund money and production problems kicked in.

"The prices of 2008 are going to be leveled," said grains analyst Rich Feltes of R.J. O'Brien in Chicago. He based his optimism on a number of variables -- continued strong demand from China, investment flows, uncertainty over the corn and soybean crops in Argentina, imports by India to defuse inflation and the possibility of a weaker dollar.

"We'll likely see gridlock in Congress in the new year and that's dollar-negative," he said, alluding to Republicans wresting control of the House of Representatives from Democrats in the November mid-term elections and raised their number in the Senate.

GRAINS CHALK UP HEFTY 2010 GAINS

The dollar typically has an inverse relationship with commodities, which are traded around the globe in the greenback. Any weakness in the dollar translates to lower costs of importing U.S. commodities in overseas currencies.

Chicago Board of Trade wheat posted its first yearly gain in three years, rising 47 percent in 2010, erasing the 42 percent combined loss for 2008 and 2009 when ample global supplies weighed on prices.

It was the biggest yearly increase since 2007. Nearly all of the gains in 2010 came in the second half of this year when Russia's wheat crop was decimated by drought and excessive rains damaged the Australian crop's quality.

In the third quarter of 2010, CBOT wheat futures surged 45 percent, the biggest quarterly growth since rising 61 percent in the quarter that ended Sept. 30, 2007. Gains moderated in the fourth quarter to 18 percent. CBOT corn rose 52 percent in 2010 for its second yearly gain and its biggest jump since 2006. It rose just 1.9 percent in 2009. Most of the 2010 advances came in the second and third quarters, rising 40 percent and 26 percent, respectively.

CBOT soybeans rose 34 percent for its second yearly gain, its biggest increase since 2007. Futures rose 17 percent in the third quarter and 26 percent in the fourth. Dale Durchholz, a grains analyst with AgriVisor in Bloomington, Illinois, said risks in investing in grains are getting higher while rewards are going lower.

"There seem to be moderate downside risks in the long term," he said. "The elephant in the room is Chinese monetary policy. Their inflation rate is growing because their economy is growing too fast. They raised interest rates twice this year, are reining in speculation and want to slow growth."

Durchholz said his long-term charts show that CBOT wheat prices could hit a six-year low at the end of 2011; corn a 5- 1/2-year low in mid-2011; soybeans a three-year low in March; and crude oil a 2-1/2-year low in mid-2011.

Charlie Sernatinger of ABN Amro in Chicago said rising inflation in Asian economic heavyweights China and India would help support grain prices as investors seek hard assets. "There is an underlying fear of inflation, which started in China and India and could permeate to the West," he said.

China has raised interest rates twice since October and increased banks' capital reserve requirements to cap inflation that has soared to the highest level in 28 months.

In India, inflation accelerated to a 10-week high in mid- December on rising prices of vegetables and fuel.

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