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2007 corn acreage problem solved?

Last week we asked the question, "Did we slow corn use enough, and attract
enough new acres of planted corn in 2007 with high winter corn prices?"

The USDA report provided the first big clue about how the 2007 corn problem (a
15 million acre problem) could be solved. Not only was the intended acreage 2
million higher than expected (at 12 million over last year), but the feed demand
was sharply reduced from expectations. While the estimated feed use was 70 mb
smaller than traders expectations, estimates for a 100-110 mb reduction in feed
use last quarter may mean feed use could be down from 500-700 mb over the next 7
quarters. That's the equivalent of 3-5 million acres of production- an
even bigger shock than the acreage number to the market. Another surprise was
an extra 4 million acres of planted acreage in 2007 (that was not planted in
2006)-even more cushion than we expected.

Given a 12 million acre hike in 2007 and a reduction in demand of 3-5 million
acres (potentially), this was a potential solution to our 15 million acre corn
problem -a seemingly insurmountable problem just a few months ago. This
astounding change in the market outlook caused significant liquidation in corn
futures-and a more negative outlook for grains going forward into spring work.

Pro Ag figured the report could pressure corn futures 15-25c, should have
provided support to soybeans of 30-50c, and was basically neutral wheat. But
prices (as they typically do) sold off much harder than that, reflecting the
more negative psychological outlook on grains (if we can solve a 15 million acre
corn problem in just 6 months, it doesn't appear there is anything the market
can't do).

We mentioned last week the potential for a negative report, but this one was
even more negative than we expected. Now, we see some estimates of corn
carryout in 2007 not only at positive levels (which the market could barely
anticipate), but also most projections are now looking at from 1-1.6 billion bu
in carryout with a 'trend' yield. All of a sudden, it may be possible to even
have some acreage switching from corn to soybeans (up to 2 million acres)
without too big a hiccup in prices.

However, we still haven't produced this crop, and assuming a 'trend' yield
almost always assumes away the most interesting aspect of a year's production
"What will weather offer us for yield?" We still don't know the answer to that, and may not for some time. Already some are proclaiming this to be a
late planting year, but it's still early April so its difficult to make that
assumption, too. The recent cold, arctic weather blast into the Corn Belt this
week stroked those worries, with some big price rises in corn today. But that
might only be a temporary occurance as weather does change often in April.
There are some very wet states (IA, ILL, IND, OH) that may have difficulty if
cool/wet weather lasts, but it might be too early to make that call in early
April.

One thing is certain- it will take a significant weather event now to push
prices back into the rapid uptrend we had going into this March report. If
weather remains benign, the next problem the market may need to address might be
finding enough acreage for 2008 to meet expanding biofuels demand. Since that
problem doesn't need to be addressed until 2008, perhaps the market can breathe
a little easier now?

On the weather front, it's been surprising how quickly winter wheat has recovered
from last year's drought reduced crop (only 41.7 bu/acre), with this year's
conditions rated the highest since 1998 at 71% good/excellent. The Pro Ag
estimate right now is over 49 bu/acre, well above last year's yield and implying
we might even have excess wheat to feed this summer. That's quite a change from
last year. Currently, the crop is improving as winter wheat soil moisture is
perhaps in the best shape in years. Of course, we need to get through potential freeze threats in early April with this cool weather (the crop is advanced more than normal), but currently it looks like we have a bumper crop on our
hands. Pro Ag yield estimates at 7.5% above 'trend' is a bumper crop, no matter
how you look at it. There's a lot of season left, but if the crop ends up at 49
bu or better, it would shatter the previous record-large winter wheat crop by
over 1 bu/acre (our previous record was 47.8 bu in 1999).

Winter wheat ratings that high make us nervous about the potential corn/soybean
crop, as clearly it suggests that even fringe areas have adequate soil moisture
at this time. Generally, good soil moisture in spring can carry us a ways,if the crop is planted on time.

Planting speed will be the next question for the market to handle, with the
first hurdle of having adequate moisture during planting probably solved in most
of the country right now. It's a matter of that excess moisture drying out in
time for 'normal' planting speed to occur.

While summer makes things more interesting with the weather card yet to be
played, perhaps the major worry of the market has already been secured in that
the potential 15 million acre corn problem now looks like a solution is at hand.

Pro Ag expects the markets to have a much more muted reaction now to weather,
with normal weather now likely leading to price weakness across the grain
complex.

Last week we asked the question, "Did we slow corn use enough, and attract enough new acres of planted corn in 2007 with high winter corn prices?"

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