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No surprise, volatility of market relies heavily on spring
 
It is quite possible we could see commodity values go from historically high levels to sharply lower ones in the next marketing year. This is coming from speculation that we will see a return to normal growing conditions across the Corn Belt and, in turn, normal yields.

This is especially true on corn, where even a below-trend yield could cause ending stocks to triple from this year’s estimated volume. This belief has the potential to cause one of the widest market inverses we have ever seen.

The first indication of possible new-crop ending stocks will be released in the February outlook forum. While this can in fact change market attitude, the real next influx of fundamental information will be the March stocks report.

As with the December release, this will give us a much better indication of actual grain usage and potential carryout. It is not out of the question this March report could set market direction through the spring and summer months.

Some economists do not believe trade fully recognizes how much rationing needs to be done to U.S. corn inventory. The USDA is projecting a corn carryout of 602 million bushels, but according to some usage forecasts, this is 200 million-300 million too high.
If correct, this would drop corn carryout to an incredibly tight level, and require significant rationing. The largest unknown in demand is feed demand, and how an elevated use there could easily be offset by a reduction in other areas.

Not only is the United States seeing elevated feed demand on corn, but on wheat. Corn for feed use spiked 300 million bushels during the first quarter of the marketing year, giving us the greatest quarter of usage since 2007.

Wheat demand rose 35 million bushels, too, as more wheat continues to make its way into rations. Wheat is struggling with poor exports, though, which is limiting the grain’s potential.
There is just as much unknown on soybean demand and carryout. In its latest supply and demand report, the USDA increased the U.S. soybean crop by 381 million bushels and indicated South American production could be up 30 million tons from last year.
Theoretically, this is more than enough soybeans to satisfy global soybean demand. The concern is, the United States will run out of soybeans and need to depend upon South America for needs without rationing.

The only way the United Sates can realistically prevent this issue from developing is by rationing at least 12 million metric tons (mmts) of soybean demand from March through the end of the marketing year. Not only does this include exports, but domestic soybean demand.

At the present time the United States has crushed 10 percent more soybeans this marketing year than last, while the USDA is actually predicting a decline of 6 percent in soybean crush. If this demand continues, it is likely we will see sharp reductions to carryout estimates later in the marketing year.

Trade continues to receive mixed signals on South American soybean production, even though harvest is getting under way. The USDA is estimating Brazil’s soybean crop at 82.5 mmts.
Private sources in Brazil claim the crop may be closer to 84 or 85 mmts, though. If correct, this would more than make up for the 1 million-ton decrease we have seen in Argentine soybean production estimates.

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.
1/30/2013