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Updated balance sheets favor corn in futures market
 
The corn numbers in the October USDA supply and demand report caught trade by surprise. The USDA increased planted acres on corn by 300,000, but this was offset by a 0.8 bushel-per-acre decrease in corn yield to a 122-bushel average.

Total corn supply for this year is now projected at 10.7 billion bushels. While corn demand was reduced by 100 million bushels from poor exports, corn carryout still cut to 619 million. This is the lowest carryout seen in an October supply and demand report.
The soybean data were more neutral to the market. The USDA increased soybean yield to 37.8 bushels per acre and added in 1.1 million more planted acres. This increase was enough to push available soybeans to 2.86 billion bushels, 23 million more than the September estimate.

The USDA increased soybean demand a large 250 million bushels, though, which will consume much of the increased output. Soybean carryout is now projected at 130 million, 15 million bushels more than September, but still a low level.

Ending stocks of wheat are now pegged at 654 million bushels, down 44 million from September. The USDA increased wheat feeding by 95 million bushels, but cut exports by 50 million.
The recent rally in U.S. corn futures has caused many of that industry’s end users and processors to suffer profit margin pressure. Margins for farrow-to-finish hog producers are currently negative through April, according to data from the firm F.C. Stone.
Cattle margins are at some of their lowest levels in months, as well. Ethanol margins have rebounded in the past week, but still remain negative for the next several months.

High corn values have pressured many end users and processors, but the one suffering the most may be the U.S. dairy industry. This is from the fact feed costs for producers is up nearly 50 percent in the past year, while milk values have slid lower.

As a result, some dairy farmers have cut back on corn use, which in turn lowered their milk production. The greatest losses are being reported in California, where many of the dairy farm operators claim they will likely sell out their herds in the near future.

More attention is being placed on U.S. weather outlooks for this fall. Long-range weather models are not calling for an increase in precipitation at this time. This is concerning as we head into the winter months, as the ground could freeze before soils are recharged for next spring’s planting season.

According to several long-range weather outlooks this drought could easily persist, especially in the Western Corn Belt.

There is some question as to how the developing El Nino weather system will affect global grain production. Some forecasters believe the El Nino will fade over winter and not be a benefit to South American grain production at all.

While this may be true, even if the system holds on until January, it will benefit crop development. The real concern would be if the system switched back to a La Nina, as that pattern can disrupt production in North America as well.

Brazilian corn has recently made its way into the Southeast feed market, and the possibility of more imports is likely. Corn can be bought from Brazil at a $55 per-ton discount to the United States at this time. The advantage shipping corn by vessel over rail has makes this decision even more likely.

The fact that feed wheat is becoming scarcer in the global market also favors the imports of cheap Brazilian corn, especially with the recent rally in the U.S. market.

One factor that may limit Brazil’s exports is logistics. This is not just for the current marketing year, but for new crop, as well.
Spokespeople in Brazil claim it will be nearly impossible for the country to move and export the larger crops being produced. Not only are Brazil’s roads and ports insufficient to move grain in a timely manner, but now Brazil’s truckers have stricter guidelines on how many hours they can work in one day.

Economists believe logistic issues cost Brazil $4 billion in revenue per year.

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.maxyieldcooperative.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.
10/18/2012