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KARL SETZER

By Staff | Dec 21, 2012

Minimal changes took place to ending stocks projections in the December supply and demand report. Corn carryout was left unchanged, while soybean carryover was cut 10 million bushels.

This returns soybean carryout to a minimal 130 mb. Demand on both commodities is being questioned though, as most analyst feel soybean usage is being underestimated, while corn demand is too optimistic.

The United States may need to re-evaluate its corn demand projections. Chinese officials have revised their corn crop estimate to a record 208 million metric tons. This compares to the USDA projection of 200 million tons, and last year’s 193 million ton crop.

If this size of a corn crop is realized, it could not only eliminate the need for China to import corn, but possibly resume limited exports.

Just as much unknown on corn demand is coming from the internal market.

Ethanol margins are negative for the next nine months in the United States, which will likely cut corn demand. This means we will likely see that corn use slow, and possibly recede in the future. Feed use is also uncertain, as lower animal units and increased competition from alternative feed grains will likely cut into demand.

While U.S. soybean demand may be leveling out, demand for soy oil continues to increase. USDA currently projects U.S. soy oil demand at 1.2 billion pounds, but private analysts have this closer to 1.9 billion.

In fact, current outstanding soy oil sales already exceed USDA projections for the marketing year. If the present demand pace continues, it will likely drop soy oil reserves to a record low amount.

Even though commodities have been pressured recently, U.S. farm income remains at elevated levels. Since 2006 U.S. farm income has doubled, mainly from the rally we have seen in commodities to record values. This makes 2012 the third straight year of record profits for U.S. farmers. The current debt to asset ratio for U.S. farmers is 10.2 percent, which is the lowest level since records began being kept in 1960.

There is a change forecast to take place in the commodity market that could have long-lasting implications for grain futures. For several weeks we have seen investors pull their funds out of commodities, which has been taken as an indication the bull-run in commodities has run its course.

This is now being verified by economists who are predicting negative returns on ag products of 3 percent this coming year. This news could easily cause additional liquidation in commodity futures.

Drought conditions continue to impact U.S. agriculture, and could well into next year. It is believed that current drought conditions will last through much of the winter months, and possibly will not be remedied until spring. Not only could this affect yields, but next year’s food costs as well.

Economists believe U.S. food values will increase from 3 to 4 percent next year as drought has not only cut feed grain production, but also impacted the U.S. livestock industry.

Issues continue to plague the United States infrastructure system. The main one of these is the low water levels we are seeing on the Mississippi River.

Shippers are now becoming cautious over sending barges down the Mississippi River, as some have been damaged from running into rocks along the bottom of the river.

As a result, we are seeing river terminals pull their bids as they know once they go full, there is no telling when they will be able to ship the grain out.

Karl Setzer is a commodity trading advisor and market analyst at MaxYield Cooperative. He can contacted at ksetzer@maxyieldcooperative.com.

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