Last Friday, the USDA released its July Supply/Demand forecast. After the bullish quarterly stocks and acreage report, traders had been expecting a bullish report as the USDA was expected to use less corn acres than the June report and possibly a smaller production figure as crop ratings have declined since the June crop report.

The USDA estimated 1.478 billion bushels of corn will be in U.S. grain bins at the end of this marketing year and 1.373 billion bushels at the end of next summer. Traders had expected 2009/10 end stocks of 1.4 billion bushels and 2010/11 end stocks of 1.292 billion bushels. U.S. corn supplies are being drawn down by strong demand for animal feed, estimated at 5.35 bb, exports of 1.95 bb and record large ethanol production of 1.33 bb.

In all, total demand for U.S. corn is estimated at 13.36 bb. Meanwhile, a near record large crop is forecast to be harvested this fall of 13.245 bb. This means demand will outpace supply by 115 million bushels, based on current supply/demand figures. The USDA forecasted that the corn supply would be 250 million bushels smaller in 2010/11 than USDA estimated a month ago, thanks due to a reduction in the current harvested acres.

A month ago, USDA said this year’s end stocks would be 1.6 bb, and for the new marketing year 1.573.

The stocks to usage ratio for corn is expected to narrow to 10.3 percent, the tightest since 2003/04.

The USDA also estimated 175 million bushels of soybeans would be in storage at the end of this marketing year, down 10 mb from its previous estimate, and 360 mb would be available at the end of 2010/11, unchanged from June.

Soybean exports were increased by 20 mb in the 2010/11 marketing year to 1.37 bb, however this figure trails the 2009/10 marketing year, which has the U.S. on pace to reach the USDA forecast of 1.46 bb, an all time record export pace.

It is very likely the USDA will be forced to increase the 2010/11 export forecast as the marketing year matures. Crush and mill usage was increased slightly to 1.645 bb and total usage was increased to 3.170 bb. This leaves U.S. ending stocks rebuilding compared to a year ago as total production, 3.345 bb, would outpace demand.

The USDA will make its first estimates of the fall harvest on Aug. 12. The estimates will include actual field surveys. Currently, the USDA’s projections assume normal weather and yields. USDA has projected a corn yield of 163.5 bushels an acre, the second-highest ever. USDA said its corn crop projections are within 7 percent of the year-end figure, on average, but end-stock projections vary by as much as 35 percent from the final figure.

The USDA raised its forecast of this year’s wheat crop to 2.216 billion bushels, up 7 percent from June due to higher yields. Winter wheat production is forecast at 1.51 billion bushels, up 2 percent from last month but down 1 percent from 2009. The United States yield is forecast at 46.9 bushels per acre, up 0.3 bushel from last month and up 2.7 bushels from last year. If realized, this will be tied for the third highest yield on record, trailing only 1999 and 2008. Its winter wheat forecast has a margin of 7 percent.

The U.S. has not seen anything as fundamentally bearish as the current U.S. balance sheets since the mid-1980s’ situation with stocks near 2 billion bushels and stocks/usage ratios of near 100 percent.

The USDA balance sheet estimates ending stocks at 1.09 bb and a stocks/usage ratio estimate at an extremely large 49.8 percent. World ending stocks were lowered from 193.93 mt to 187.1 mt due to crop problems being reported in Canada (too wet) and in Russia and Kazhatzan (too hot and dry).

Corn analysis

Corn closed the week $.11 higher. Corn continues to move higher on the strength fund buying and spillover

strength from the wheat market. There are producers who report concerns about this year’s crop, but many producers not they expect to have their largest yields ever.

Last week’s crop progress report showed national good to excellent ratings were 71 percent, 2 percent lower compared to a week ago. Iowa is rated 65 percent g/e, Nebraska 83 percent, Minnesota 89 percent, Illinois 68 percent and Indiana at 62 percent.

Now, 10 percent of the crop is rated either poor or very poor. Last year’s ratings were 71 percent g/e and only 8 percent p/vp.

The weekly export sales report showed net sales of 501,200 metric tons for delivery in 2009/10 were down 23 percent from the previous week and 48 percent from the prior four-week average. This year’s export profile is now at 1.938 bb versus the USDA forecast of 1.95 bb.

Soybean analysis

Soybeans closed the week $.8 3/4 higher from last week. Last week, the USDA reported a 120,000-mt soybean sale to China and a 40,00-mts bean oil sale to China and, later in the week, the USDA reported two separate 116,000-mt soybean sales to China.

All sales were for the 2010/11 marketing year. It’s these strong export sales that is providing support to the market as it mandates the U.S. produces a large crop to meet the strong demand.

The USDA reported crop ratings of 66 percent g/e, down 1 percent from last week. Iowa is rated 64 percent g/e, Illinois at 59 percent, Indiana 60 percent, Minnesota 83 percent and Nebraska at 74 percent. 10 percent of the crop is rated poor to very poor.

Last year, 66 percent of the crop was rated g/e and 8 percent was rated p/vp. The weekly export sales report showed net sales of 262,600 mt for delivery in 2009/10 were down 1 percent from the previous week, but up 23 percent from the prior -week average.

This year’s export profile remains well ahead of last year’s record pace at 1.453 bb versus the USDA forecast of 1.46 bb.

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.