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DAVID KRUSE

By Staff | Apr 9, 2010

One major demand change that I see coming is competition for corn exports from South America. China may soon begin buying corn, but it will likely be supplied from South America.

Brazil Iowa Farms began farming in Bahia Brazil in 2004. It’s a tropical climate there and corn is not a tropical crop. Corn needs cool nights and warm days to maximize starch translocation, adding yield. That’s why Washington state usually produces the highest U.S. corn yield. The temperature range is perfect there.

Nights are too warm for best corn yields in Bahia. Seed companies recognized the potential and we have seen them adapt corn genetics to the warmer climate so that corn yields in Bahia have doubled since 2004. Brazil is adopting GMO hybrids, which also contributes to sharply improving yields there.

South America is now a huge competitor for U.S. soybean exports. Something similar to that is now in the initial stages of occurring in corn. U.S. corn export potential is going to flatten out or even contract due to growing South American competition.

Some day, the South American corn crop will be anticipated with interest more closely to what is given South American soybean crops today. I have seen far more yield improvement in corn in Bahia, than I have soybeans the last six years there.

Pioneer and other seed companies have invested a lot in Brazil’s corn production and it looks to be paying off.

A new, 1,150 kilometer railroad is under construction to link Western Bahia to the coast , so cost of transportation from the farm to the world market is going to change significantly for the better there, too.

Soybeans are processed regionally with much soymeal consumed by the poultry industry with other products being exported. The railroad will allow producers more economical transportation of a bulk grain like corn.

All the worry about food versus fuel over U.S. ethanol production will soon be buried in global supply.

Last year, the Corn Belt suffered for lack of heat units. This negatively impacted corn quality. Bears said poor quality would be adjusted for in subsequent stocks reports. Nevertheless, USDA reported a record crop. USDA has claimed that it had light test weights accounted for but no one believed that.

The USDA stuck to its story, reporting quarterly corn stocks of 7.69 billion bushels near the high end of trade estimates and about 400 million bushels above the low trade estimate. There is no shortage of corn.

When on a recent round of speaking engagements, I was confronted by a lot of farmers who told me that they had a lot of unpriced corn in the bin.

Profitable pricing opportunities for 2009 old crop corn are gone, and new crop isn’t looking good either. USDA says that farmers are holding over 1.2 billion bushel more corn on the farm in storage than a year ago.

The market doesn’t go up as well with grain in first hands. Farmers are in the hope mode.

A 5 1/2-year cycle low is due in December 2010. When that cycle low is due you look for bearish fundamentals that could fit it.

A 14 billion bushel corn crop would be one candidate. Another would be the Congressional failure to reauthorize the ethanol tax credit and tariff.

In years in which the 5 1/2-year corn cycle bottoms, market highs are often made early and it appears highs were made in December through January. That was some of our reason to have made aggressive sales at that time.

Profitability cycles and it is shifting now from grain producers to livestock as feed costs decline and livestock prices improve. The one thing that I believe is that trade expected the USDA to tighten soybean stocks in the quarterly stock report.

It did, about 30 million bushel, but the trade 100 million. I suspect that’s about it now. That’s as tight as it will get. China consumes 42.5 million metric tons of soybeans and estimates of the year-to-year increase in South American soybean production range from 33-38 mmt.

That means that the increase in South American soybean production this year will take care of most of China’s needs.

The U.S. filled the hole in global supply created by the 2008-09 drought in South America. The U.S. should then cut back soybean production now that South American production has recovered.

That’s not what is happening though, as U.S. soybean acreage continues to expand even as Chinese buying here will slow in the year ahead as it sources more soy from the south.

U.S. soybean carryover has the potential to mushroom in size as a result. Better sign up for the ACRE program. Soybeans are going to have to get cheap again to buy some demand.

While USDA put corn/soy acreage near 89 and 78 million acres, respectively, there are more acres available so if weather this spring is favorable (as it looks to be shaping up to be) expect actual planted corn acreage to grow by 1 to 2 million acres yet.

We have a full profile of subsoil moisture in the Corn Belt and if crops are planted on time with full moisture reserves, Mother Nature will have to come up with a real curve ball in late season weather to hold down the score.

Not only will soybean acreage grow this year, but the quality of 2010 soybean acreage is improved over last year. There will be fewer acres in Georgia and North Carolina and increases in soybean acreage in Illinois, Iowa, Kansas and Nebraska where yields tend to be higher.

Also, remember there will be more RR2 soybeans planted with 7 to 12 percent higher yields.

Monsanto guarantees that don’t it? Yeah, right!

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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