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January crop report surprises trade

Just when everyone thought all the bullish news in corn that could possibly happen was in the market, the USDA threw in a new twist on the January crop report that was released on the morning of Jan. 11.

As everyone knows, with the sharp increases in corn usage from ethanol, strong export demand and sharply increased buying from index funds, the corn market has been inundated with bullish news to push prices higher. The only thing that has not occurred in the corn market is buying from China (which historically has never happened in large quantities).

But the real jolt to the corn market now is the sharp increase in poultry and pork numbers, which increased feed usage of corn to approximately 300 million bushels more than the trade had expected.

The result: supplies for this year are not actually an issue. USDA is expecting carryover supplies at the end of August to be 1.438 billion bushels versus last year's 1.304.

But the issue comes a year from now when the ethanol plants that are under construction bump up usage to nearly 4 billion bushels or possibly higher, which will likely cut carryover in 2008-09 to under 1 billion bushels. Thus, the battle begins.

No pun intended, but this is a train wreck for the industry. The question now becomes — what could possibly happen to get carryover supplies back in line, which means a cut in usage?

Some “what ifs” that might happen:

Expect a pullback in poultry production for the first time in history. The cut may not be large, but profits are hurt enough in the poultry industry that cutbacks are almost a given now.

Energy prices, contrary to the popular press, appeared to have made a major top. Lower crude oilprice , diesel fuel prices and gasoline prices could well lead to lower ethanol prices, which then could lead to some of the plants that are on the drawing board being pulled.

Exports could drop marginally at these price levels, but I believe this to be less likely than the two above-mentioned possibilities.

Prices are now in uncharted waters. This makes decision-making more difficult than ever because there is no way of making any comparisons. Nothing like this has ever occurred. $5 corn seemed almost impossible six months ago. Now $6 corn may not stop this move.

The profitability of farming this coming year will most likely set another record. If this market repeats history, however, at some point the market will become extremely overextended and whatever goes up sharply will also come down sharply.

Scale up selling still works best in major bull markets.

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