On Friday, the U.S. Department of Agriculture issued its monthly supply/demand figures. The report held virtually no major surprises for the market, with a less-than-expected increase in U.S. corn ending stocks figure the biggest surprise for the trade to deal with.

The USDA forecast U.S. corn production at 12.932 billion bushels, up 2 percent from last month and 7 percent higher than 2008. Based on conditions as of Sept. 1, yields are expected to average 161.9 bushels per acre, up 2.4 bushels from August and 8 bushels above last year. If realized, this will be the highest yield on record and production will be the second largest, behind only 2007, which was 13.038 billion bushels.

Yield forecasts increased from last month across the western Cornbelt and the northern half of the Great Plains as mild temperatures and adequate soil moisture supplies provided favorable growing conditions. Yield prospects were unchanged in the eastern Cornbelt where dry conditions during August depleted soil moisture supplies.

The 193 million-bushel increase in production was mostly offset by a 100 mb increase in exports to 2.2 bb and a 50 mb increase in feed usage. The USDA left its corn ethanol usage estimate of 4.2 mb unchanged from last month.

The USDA’s new export forecast of 2.2 bb is the second highest annual export forecast of the last 14 years. This is 350 mb larger than a year ago at this time. Ending stocks were raised slightly to 1.635 bb from 1.621 bb in August.

The USDA forecast soybean production at a record high 3.245 billion bushels, up 1 percent from the August forecast and up 10 percent from last year. The previous record was achieved in 2006/07 with a 3.197 bb production.

Based on Sept. 1 conditions, yields are expected to average 42.3 bushels per acre, up 0.6 bushel from last month and up 2.7 bushels from 2008. If realized, this will be the third highest yield on record.

Compared with last month, yields are forecast higher or unchanged in all states except Indiana, where the yield is expected to be down two bushels.

The largest increases in yield from the August forecast are expected in Alabama and Maryland, up 5 and 6 bushels, respectively. If realized, the forecasted yield in Alabama, Georgia, and Mississippi will be a record high and the forecasted yield in Nebraska, North Carolina, and Ohio will tie the previous record high.

Area for harvest in the U.S. is forecast at 76.8 million acres, up slightly from June and up 3 percent from 2008. The 46 mb increase in production was offset by a 20 mb increase in crush to 1.69 bb and a 15 mb increase in export – 1.280 bb.

The export forecast is unchanged from the previous marketing year. The net result was a 10 mb increase in new crop ending stocks to 220 mb. The USDA left the world stocks essentially unchanged at 50.5 mmts.

This is up sharply from one year ago when the USDA forecast 40.2 mmts.

This month’s U.S. wheat balance sheet revisions were extremely uneventful with the USDA’s wheat crop production revisions coming in the Sept. 30 Small Grains Summary.

USDA left the 2009/10 U.S. all wheat balance sheet completely unchanged this month with ending stocks at 743 million bushels, while the market was anticipating an increase to 769 million.

The USDA also did not make any meaningful changes to the world balance sheets with Australian, Canadian, Chinese, Indian and Pakistani wheat crops were all unchanged. The USDA did raise 2009/10 world wheat ending stocks to 186.6 mmt from 183.6 mmt last month and 169.0 mmt last year.

Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien.

Corn analysis

Corn closed the week $.13 1/2 higher. The weekly export sales report showed net sales of 1.025 metric tons for the 2009/10 marketing year (which began Sept. 1) were primarily for Japan (232,100 MT, including 52,700 MT switched from unknown destinations), Mexico (209,300 MT), unknown destinations (193,800 MT), Egypt (96,000 MT, including 60,000 MT switched from Syria), Peru (78,000 MT), and South Korea (62,800 MT, including 60,000 MT switched from unknown destinations).

As of Sept. 6, the 2009 crop was rated at 68 percent good-to-excellent versus 61 percent a year ago. The USDA increased its yield estimate to 161.9 bushels per acre, however this will no doubt rise into the final report in January unless a killing frost quickly hits the Cornbelt.

I think the USDA is also overstating demand trends. Feed usage looks to be overly optimistic and increasing exports due to an increase in the size of the crop is probably premature. A slowdown or reduction in demand, would leave ending stocks actually closer to 2 billion bushels.

The huge crop combined with swelling ending stocks is bearish for prices over the next four months. Producers should be prepared to reward rallies with additional sales and hedges. Corn has held weekly support at $3.08, but this looks to give way during harvest.

Soybean analysis

Soybeans closed the week $.19 lower. The weekly export sales report showed net sales of 830,600 MT for the 2009/10 marketing year (which began Sept. 1) were primarily for China (397,900 MT), unknown destinations (145,000 MT), Taiwan (127,300 MT), Egypt (50,000 MT), and Japan (41,300 MT). A total of 2.2 MT in sales were outstanding on Aug. 31 (the end of the 2008/09 marketing year) and carried over to the 2009/10 marketing year.

Exports of 148,200 MT were reported for Aug. 28 to Aug. 31. The USDA rated the soybean crop, as of Sept. 6, at 68 percent g/e, well above last year’s crop rating of 57 percent. This is the highest rated soybean crop since 1994. The USDA increased the soybean yields to 42.3 bpa and will likely continue to increase the soybean crop unless a killing frost emerges quickly.

Soybeans appear poised to work lower during the next three to six weeks as the U.S. will harvest a record crop and this harvest pressure will initially weigh on prices.

South America is expected to increase its planting compared to a year ago, which, if its produces a large crop, will surely hurt the U.S. export profile. Look for soybeans’ values to work lower after Labor Day until harvest data becomes available to the market.

Look for November soybeans to eventually test the $7.90 support areas.