On Feb. 9, the USDA released its supply/demand report for the month of February. This report is typically not a major market mover and this month’s edition held no fan fare or surprises.

Backed by the EPA’s favorable ruling on corn-based ethanol last week, the USDA took the opportunity to raise corn for ethanol usage by 100 million bushels from last month to 4.3 billion bushels, which is up 17 percent from last year’s 3.677 bb. As long as crude oil prices stay strong, ethanol margins should remain profitable, which would support corn demand.

The USDA did lower 2009/10 U.S. corn exports by 50 million bushels to 2.0 bb. The USDA also lowered corn food usage by 5 million bushels, bringing the net demand change to an increase of 45 million bushels.

This lowered 2009/10 U.S. corn ending stocks to 1.719 bb, from 1.764 bb last month, and compares to last year’s 1.673 bb.

The reduction in stocks was slightly more than the market expected at 1.748 bb. This figure left the stocks-to-usage ratio at 13 percent, unchanged from last month.

USDA further raised their estimate of 2009/10 U.S. soybean exports today to a new record of 1.4 bb, up from 1.375 billion last month and well above last year’s pace of 1.28 bb.

USDA also slightly raised the U.S. soybean crush by 10 mb from last month to 1.7 bb and compares to 1.66 bb a year ago.

With the residual usage and seed usage unchanged, the 35 million bushel increase in demand reduced 2009/10 U.S. ending stocks to 210 million bushels from 245 million last year. This was below the average trade estimate of 219 million and compares to 138 million last year. The soybean balance sheet is looking much more than just a few months ago when the USDA was estimating U.S. soybean ending stocks at 270 million bushels in November.

It is interesting to note that the USDA has understated final U.S. soy demand on the February crop report every year, but one since 1990. USDA’s February 2009 crop report underestimated final 08/09 U.S. soy demand by 80 mb in 2009 when the South American crop experienced production problems and China turned to the U.S. for more soybean purchases.

The USDA raised the 2010 Brazilian soybean crop by 1.0 million metric tons to 66 mmt this month, which compares to 57.0 mmt last year. Brazilian exports were raised 1.3 mmt from last month to 25.3 mmt and compares to 30.0 mmt last year.

The Brazilian crush was lowered 0.5 mmt to 31.6 mmt versus 32.5 mmt last year. USDA left the Argentine soybean crop unchanged at 53.0 mmt, but sharply lowered its exports for 2009/10 by 2.0 mmt from last month to 7.85 mmt.

This would still be up from 5.6 mmt last month, but reflects a reduction in expected export competition.

The USDA raised Argentine ending stocks to 24.4 mmt from 22.9 mmt last month and 16.2 mmt last year. Brazilian ending stocks were lowered to 16.9 mmt from 17.8 mmt last month.

The only change in the U.S. wheat balance sheet was a 5 million bushel increase in imports. With all demand categories left unchanged, USDA raised 2009/10 U.S. wheat ending stocks by 5 million bushels to 981 million, which is sharply above the 657 mmb last year. The market was looking for ending stocks at 973 mb.

On the world front, the only revision of note was a 1.0 mmt increase in the Argentine wheat crop from last month to 9.0 mmt and would be unchanged from last year. Argentine wheat exports were raised 1.0 mmt to 3.5 mmt and compares to 6.7 mmt last year.

USDA largely left world wheat ending stocks unchanged at 195.9 mmt versus 195.6 mmt last month and compares to 164.0 mmt last year.

Corn analysis

Corn closed the week $.10 higher. A combination of commercial buying and short-covering surrounding the monthly supply/demand report allowed corn to close the week higher. Export business was quiet this week with no private sales reported by the USDA. Commercials continue to provide support to the market as they are buying back their shorts and are now using price weakness as an opportunity to extend coverage into the summer months, which always brings uncertainty and production concerns.

As the prices work lower during the winter months, producers should look to use options as a way to re-own cash sales for a summer rally. If prices fall to weekly support of $3.10, look for major commercial buying to support the market at this area and should establish a winter low. The weekly export sales report showed net sales of 743,200 metric tons for delivery in 2009/10 were down 20 percent from the previous week and 21 percent from the prior four-week average.

Soybean analysis

Soybeans closed the week $.31 1/2 higher. Prices shot higher last week on a combination of major commercial buying and short-covering surrounding the monthly supply/demand report.

Growing conditions in South America remain nearly ideal as it has been warm with timely rain showers. Soybeans continue to be on pace to test key support at $8.92 before finding seasonal lows. The commercials are now holding a net long position.

Seasonals are also trying to turn higher as a seasonal low is normally scored during February. The weekly export sales report showed net sales of 312,900 mt for delivery in 2009/10, a marketing-year low, were down 18 percent from the previous week and 54 percent from the prior four-week average.

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.