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DAVID KRUSE

By Staff | May 20, 2011

There are at least 3 million acres flooded along the Mississippi; farmers have barely turned a wheel across the northern Corn Belt and extreme eastern Corn Belt; there is more rain forecast for the wet regions, but USDA thinks that farmers will plant every acre of corn and soybeans intended last March in its May supply/demand report.

It doesn’t really think that, but they don’t know how much to change acreage yet, so left it alone. A conservative loss estimate of 1 million acres each would subtract 158 million bushel of corn and 43.5 million bushels of soybeans, reducing carryovers to critically tight levels. USDA reduced its 2011 corn yield to 158.7 bushels per acre.

It cut usage enough to end up with 900 million bushels of corn in carryover next year. This is based on assumptions that are highly dubious and even unrealistic. It raised this year’s carryout to 730 bushel after a rationing process that hasn’t happened yet.

USDA lowered world corn ending stocks slightly for this year boosting them for next year based on the great crop we are going to produce. USDA increased this year’s soybean carryout to 170 million bushels, while cutting next year’s to 160 mb. USDA used 76.6 million acres, sticking with March intentions, and a 43.5 bpa soybean yield.

It boosted this year’s world soybean ending stocks nearly 3 million metric tons in part from increasing Brazil 1 mmts, but took it away from world soybean ending stocks again next year.

I thought the USDA would blow smoke in supply/demand reports and that is what it did – painting any picture it wants to avoid raising alarms. The USDA estimates winter wheat production at 1.42 billion bushels, but will anybody believe it? The USDA data will be construed as bearish, but comes from general assumptions that are not the most likely scenario anymore as they conflict with current reality.

In 1974, a correlating year weather wise, CBOT markets didn’t do anything in May. If negative USDA reports keep rationing from happening now, they will contribute to a crisis later. The USDA is not going to predict a crisis ahead of time. USDA took most of the corn demand adjustment out of exports, reducing them 87 million bushels from last year and another 100 million to 1.8 billion next year.

It reduced corn feed usage by 50 million bushels, offset by adding 50 million bushel to ethanol. The problem is that current consumption by both feed and ethanol exceeds the USDA estimate, so rationing that has to occur to reduce consumption to what the USDA says it will be, has not happened yet.

The livestock industries have summer production set. Ethanol margins are positive. Lower prices will encourage continued usage at unsustainable levels. The USDA posted dubious assumptions.

By leaving feed and ethanol consumption collectively unchanged, they had to compensate with something and exports were the only category left. This report looks to have been put together by accountants rather than grain analysts.

The USDA did the run around with soybean supply/demand assumptions, but ended up in the same spot for a 2012 carryover at 160 million bushel, which is pipeline supply. Actually, that fits my general analysis that regardless what happens, how many acres get planted or what the yield is, we will end up with a pipeline supply carryover because demand will adjust to consume what we produce.

USDA reduced the crush 15 million bushels and exports by 10 million bushels and still ended with pipeline supply. Lose 3 million acres or 3 bpa from the yield – one or the other – and the soybean carryover is gone, left to rationing to produce one.

The headline read “Corn plunges on report of surplus” The report did have something to do with it; it was negative relative to trade expectations. But market weakness, however, was general to all commodities triggered by macro market-related fund liquidation.

There is no surplus. Carryover estimates given by USDA were best case scenarios. They are already likely unachievable because the late spring and river flooding has cost some acres that the USDA has not deducted yet. It is not that it won’t. It just doesn’t have the information to accurately adjust acreage to conditions yet.

The USDA’s 158 bpa corn yield is also far above ISU Climatologist Dr. Elywnn Taylor’s. Bears were hoping that the crop would go in early and they could pull some supply from new crop with an early harvest.

Even corn planted early didn’t grow because ground temps were so cold. There will be no early harvest, unless of course we get a killing freeze in September that would end the growing season early and force maturity. That would not be a good thing either.

Any loss of acreage or yield – and some of both is likely – and carryovers will be revised lower. They are starting from tight stocks and a crop condition overall made vulnerable by the late spring. They have now lowered the bar so far for exports that we have shifted from not reaching USDA export targets to a good potential that they will be exceeded.

Lower prices will find demand. Lower prices will encourage consumption. Lower prices now are the recipe to tighter stocks and higher prices later.

We are in the off season for soybeans here. Weather may not be the factor for soybeans that it is for corn. Some intended corn acreage may slip to soybeans, but some soybean acres may opt to prevented planting too.

Most years the USDA has forecast a huge soybean surplus and then China bought them all up down to pipeline supply. While there is concern that China is tightening, it will have little, if any, impact on soybean consumption. China must import to control food inflation. The Chinese can go without iron ore, but not food.

USDA is projecting pipeline supply carryover to begin with this year. Any loss of acreage or yield and rationing is demanded. I still expect $15 soybeans sometime for this crop.

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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