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DAVID KRUSE

By Staff | Jul 19, 2012

USDA recognized the seriousness of the drought impact on crops by making substantive reductions in the crop yields to 146 bushels per acre for corn and 40.5 bpa for soybeans.

It adjusted harvested acres only slightly, 200,000 corn acres less. We think that abandonment due to the drought will be far larger than that.

Some intended soybean acres may never have gotten planted as dry conditions prevented double cropping. The adjustments made by USDA to harvested acres to date are far below historical correlation with past droughts.

It needs to have rained by the time you are reading this to stop deterioration now taking hold in the region where 40 percent of the crops still rated good-to-excellent were located. The 146 bpa is only 10 percent below trend line yield.

1983 was 20 percent below and 1988 was 25 percent below trend. Crop condition ratings fell to 15 percent g/e in 1988 and recovered to just 20 percent as rains do little good for the corn crop when they come too late.

It is too late for the corn crop in the Southeast Corn Belt. Crop condition will continue to deteriorate until the Corn Belt receives general soaking rains.

USDA factored the reduced yields into supply/demand balance sheets. On corn, they found 52 million bushels of old crop corn, which is always surprising how they pull these things out of the closet when they think they need them.

The USDA is trying to emphasize that the country will not run out of corn this year, but we’ll have a lot of rationing to do not to run out of corn next year.

USDA compensated for the reduced production by cutting feed use 650 million bushel, the corn crush 105 mb, another 100 mb from ethanol and 300 mb from exports totaling 1.155 billion bushels. That was sure easy, wasn’t it?

The pork industry won’t cooperate voluntarily as it’s only forced into liquidation by losses, but the cattle and poultry industries have shown more flexibility. The drought has to end and pastures and ranges have to recover to keep feeders on grass and out of feedlots to reduce corn consumption.

There has been a lot of talk about the need to shrink the ethanol industry revisiting the Renewable Fuels Standard. The USDA did not put this in its numbers.

It believes the RFS will stay as it is using 4.9 bb. The last time corn prices traded $7 to $8, the Environmental Potection Agency stood firm on the RFS. I do think that there is a scenario where a 20 percent one-time waiver may be considered if the crop losses prove severe enough.

The anti-ethanol crowd would like to use a corn shortage to cave in the RFS altogether. A 1.183 bb projected carryover would be nothing to be alarmed over except we believe that is a place holder for another year of tight stocks.

I don’t think that anything will get done on the RFS until after the election, the RFS being more at risk from Republicans than Democrats. Pro-ethanol Republicans do not hold sway in their party on this issue. It may sound simple to some to just cut back on ethanol to compensate for reduced corn supply, but there are consequences so that it is not a net sum game.

Food processors love to raise prices under the guise that ethanol usage forced their hand. Then they report record profits. They will see this as an opportunity to do the ethanol industry harm.

More than 30 percent of the corn going into ethanol comes back as feed in distiller’s dried grain. When there is no other feed source to compensate, reducing DDG production will exacerbate a feed shortage. There is no extra soymeal to feed.

If the RFS was cut 20 percent, gas prices at the pump would jump sharply. That would be a 2 percent reduction in the motor fuel supply. Politicians are not going to want to see higher gas prices before the November election. After the election Congress will be consumed with attending to not plummeting off the fiscal cliff that has created in tax and spending issues that have to be addressed at year’s end.

The USDA was correct in essentially saying that it will take a lot bigger crop yield calamity than what they recognized in this report to generate a significant over-haul of the RFS. The problem is we still may get it. The reduction in demand in the USDA corn balance sheet looked to be the easy adjustments to make. If the crop deteriorates significantly further the disruption to demand will intensify greatly. The corn and soybean markets will destroy demand.

New crop November soybeans have a technical target of $17.12. December corn targets to $8.43 as long as the chart gap remains open at $6.85 top $6.76.

Real shortages forcing end-users out of business would play hell with the market in the future. I allude to how $2 cotton produced 65 cent cotton as a result of demand destruction.

This year the big risk to farmers proved to be production risk. That means they will draw heavily on crop insurance. Next year it will be price risk.

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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