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BRIAN HOOPS

By Staff | Aug 20, 2010

On Aug. 12, the USDA released the highly anticipated August supply/demand report. The USDA forecast U. S. producers will harvest a record large corn crop at 13.365 billion bushels, up 2 percent from 2009, with an average yield of 165.0 bushels per acre.

U.S. soybean production is also forecast at a record high of 3.433 bb, likewise up 2 percent from a year ago with an average yield of 44.0 bpa. U.S. wheat production of 2.285 bb, up 2 percent from the July estimate at 2.26 bb.

The average forecast yield is 47.5 bpa, up 3.3 bpa from a year ago and the second highest yield in history, only behind 1999.

U.S. corn and soy ending stocks 2010/11 were unchanged for soybean from July and slightly less than the July estimate for corn. Corn ending stocks were estimated at 1.312 bb, slightly above trade estimates, but down from the 1.373 bb estimated in July due to the USDA increasing exports by 100 mb and increasing demand by 130 mb. This puts the stocks-to-use ratio at 9.7 percent.

For soybeans, ending stocks were 360 mb, unchanged from July, despite the increase in production. Soybean exports were increased by 65 mb due to the strong export profile and overall demand is now projected at 3.243 bb with stocks to usage ratio of 11.1 percent.

A devastating drought in Russia and neighboring European countries has dramatically reduced world wheat harvest prospects and in turn, world ending stocks. Crop problems in Russia and elsewhere will boost demand for U.S. wheat, slashing estimates of ending stocks.

The USDA forecast U.S. wheat exports at 1.2 bb, up 200 mb from the July estimate as demand shifts to the U.S. as Russia has implemented a grain export ban.

Wheat ending stocks were forecast at 952 million bushels, down from 1.093 bb estimated in July, but still the largest in 11 years.Wheat stocks to usage ratio is 39.9 percent.

lobal wheat supplies for 2010/11 were reduced sharply with world production lowered 15.3 metric tons, mostly on reductions for EU countries. The USDA slashed world production by 2.3 percent to 645.73 mts.

Traders had anticipated an estimate around 650 mts. This is the third month in a row that USDA has lowered its forecast for world wheat supplies, taking its estimate down a total of 4 percent since May and lowering its projection for ending stocks by 12 percent or 23 mts since May. Russian wheat production was cut to 53 mts from 61.7 mts in 2009/10.

Bottom line: The USDA did nothing to disappoint market bulls with this report. Wheat stocks continue to decline and demand is shifting over to the United States. Corn and soybean crops are record large, but demand is strong enough that ending stocks didn’t increase, in fact, corn stocks declined.

Bears have to hope the size of the crop continues to grow as it doesn’t appear that demand is going away anytime soon.

Corn analysis

Corn closed the week $.06 3/4 higher. Last week, the USDA reported private sales of 480,000 mts to Mexico, 180,000 mts to Egypt, 103,632 mts to Japan and 290,000 mts to an unknown destination.

Last week’s crop progress report showed national good-to-excellent ratings were 71 percent, unchanged compared to a week ago. Iowa is rated 70 percent g/e, Nebraska 82 percent g/e, Minnesota 91 percent g/e, Illinois 64 percent g/e and Indiana at 65 percent g/e. 10 percent of the crop is rated either poor or very poor.

Last year’s ratings were 68 percent g/e and 10 percent p/vp.

This year’s export profile is now at 2.041 bb versus the USDA forecast of 1.975 bb.

Strategy and outlook: Hedgers have sold/heged a portion of the 2010 crop when December futures traded above $4.50 and between $3.80 and $4. Producers should have also bought new crop put option protection and should use additional market strength to roll put options to a higher price level.

Making 2011 sales above $4.50 is a great place as next year’s marketing plan.

Soybean analysis

Soybeans closed the week $.04 1/2 lower from last week. Last week, several export sales were announced. China purchased 799,000 mts of soybeans, while Egypt purchased 200,000 mts and another 180,000 mts were sold to an unknown destination.

The USDA reported crop ratings of 66 percent g/e, unchanged compared to last week. Iowa is rated 73 percent g/e, Illinois at 63 percent g/e, Indiana 65 percent g/e, Minnesota 86 percent g/e and Nebraska at 77 percent g/e. 11 percent of the national crop is rated poor to very poor.

Last year, 66 percent of the crop was rated g/e and 9 percent was rated p/vp.

This year’s export profile remains well ahead of last year’s record pace at 1.504 bb versus the USDA forecast of 1.470 bb.

Strategy and outlook: Producers have sold/hedged the 2010 crop when November futures traded above $10.30, $9.87 and $9.60. Producers should have purchased new crop put option protection and can use additional price strength to roll up those put options to better protection levels.

Making 2011 sales above $10.30 is a great place next year’s marketing plan.

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.

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