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USDA makes minimal changes in its December numbers
Minimal changes took place to ending stocks projections in the USDA December supply and demand report. Corn carryout was left unchanged, while soybean carryover was cut by 10 million bushels.
This returns soybean carryout to a minimal 130 million bushels. Demand on both commodities is being questioned though, as most analysts feel soybean usage is being underestimated, while corn demand is too optimistic.

The United States may need to reevaluate its corn demand projections. Chinese officials have revised their corn crop estimate to a record 208 million metric tons (mmt). This compares to the USDA projection of 200 mmt, and last year’s 193 mmt 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 demand. This means we will likely see that corn use slow, and possibly recede in the future.
Feed use is also uncertain, as fewer 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 pounds.

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 money 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 well believed 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 3-4 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 about 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/market analyst at Maxyield Cooperative.

His commentary and market analysis is available daily on radio, in newsprint and on the Internet at www.maxyield cooperative.com
The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources are believed to be accurate.

This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.
12/19/2012