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USDA catches trade off guard with estimates

Grain producers will soon find out if USDA’s September estimates of corn and soybean production were wildly optimistic, or a result of improved drought resistance, especially in corn hybrids.

Soybean production was pegged at 2.856 billion bushels, up from last month’s estimate of 2.79 billion bushels and down from last year’s record 3.14 billion bushels. Corn was estimated at 10.64 billion bushels, up from last month’s 10.35 billion bushels and down from last year’s 11.8 billion bushels.

Soybean ending stocks were estimated at 205 million bushels, while corn ending stocks were estimated at 2.08 billion bushels.

The market was expecting to see higher yields in corn and soybeans, because of higher early yields coming off the combine. But not this high. According to Jim Bower, Bower Trading, “the corn production number is 338 million bushels above trade expectations, which is almost unbelievable. The soybean number is also a shell-shocker at 45 million bushels above trade expectations. The numbers are going to change the way the market sees the old crop carryover.”

On the other hand, there are millions of acres of grain to be harvested, including a lot of corn and soybean acreage hit hard by drought this summer, meaning the numbers could decline significantly as harvest moves along.

“I’ve been touring the fields myself and the intermediate to late variety beans have been suffering due to dryness we’ve seen the last several week,” Bower said.

On the other hand, the higher corn yields could be reflective of how well new technology and improved corn hybrids can perform in adverse conditions, said Greg Grow, Archer Financial Services.

Grow added that two factors have pushed corn basis lower recently. “One was the clearing out of old crop corn and the record corn ending stocks. The other was Hurricane Katrina. We saw the port close for roughly two weeks, and there has been a lot of apprehension because roughly 65 percent of our exports go through the Port of New Orleans.

“If the port comes back on stream ahead of harvest, we’ll see some of the lower basis negated.”

Once the port is back on-line, “then it’s going to take seven to 10 days to get barges going back north again under the loading spouts. Watch the cash prices when that happens. If farmers are holders of grain, basis is going to have to tighten up to draw that grain out. I assure you, they are going to want to keep grain flowing out of the country.”

USDA lowered Brazilian 2004-05 soybean production another 2 million tons in the report. “The general expectation is that Brazil could look at the possibility of lower acres this year due to financial constraints and other issues,” said Grow.

“Those other issues include reports that many farms are for sale in the Mato Grosso area of Brazil. There are also reports of a substantial drop in acreage in Brazilian soybeans.”

In addition, “fertilizer costs and the cost of transporting fertilizer into the right places is completely off the chart,” Grow said. “I believe Brazilian and Argentine producers will be much more affected than U.S. producers by this U.S. estimate, and Brazil’s acres for this coming year will start going down. With energy prices where they are, it’s going to be very tough on the Brazilian producer.”

Fortunately, there is a bullish undertone to the demand for grain, noted Bower. “There is off-the-chart growth in protein consumption from China. China has lost about 100 million metric tons of corn stocks in the last six years. It has increased the size of dairy herds, poultry and hog operations. China is going to build more roads in the next 20 years than the United States currently has. Their GDP is in the 9 percent to 10 percent range. Urbanization is almost off the charts. China will be a net importer of corn in 2007.”


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