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Historic low corn/soybean ratio eyed

USDA's Nov. report was out this week, with another round of smaller U.S. crop sizes, but larger world crop production.  

The U.S. corn crop was reduced another 1.4 bu/acre, as Pro Ag expected, with corn yields now estimated at 146.7 bu/acre, well below 'trend' yields (about 9% below 'trend').  This is a virtual crop disaster for modern times, with the new triple-stacked corn that we raved so much about in its earlier years no longer a strong factor in this crop year.  

Late planting, followed by a hot/dry July and August, seemed to doom the crop, especially in southern areas like the HRW wheat belt and the Southeast.  There, crops were very disappointing.  But the crop was also disappointing in northern growing regions, with ND and MN very poor in crop production despite a season with mostly above normal precip.  

Soybean crop yields were also reduced in the Nov. report (to the surprise of some), with a 41.3 bu/acre estimate which reduced the crop size slightly.  However, the ending stocks of soybeans were hiked 35 mb to 195 mb as the export forecast was reduced a huge 50 mb in this report!  

That left ending stocks almost 20% higher than the October estimate, and has led to weakness in soybean prices despite a crop yield in soybeans that is 5% below 'trend'.  That normally would be a bullish development, but the improved 2011 world crop production has put a damper on crop prices, despite a poor US crop in 2011.  

Wheat production also was lowered in the November report (a report that usually doesn't update wheat numbers), but due to the terrible crop season in northern Plains regions, acreage and yield numbers were updated in this report.  Reduced acreage of durum and reduced yield estimates of durum and HRS wheat were finally reflected in the Nov. report (nearly 3 months after harvest ended), with another reduction of the crop size.  

This was truly a disaster in the northern Plains, especially ND, where over 25% of the farmland was not planted due to the wet spring.  Yields were also poor, and the crop price outlook for durum and HRS wheat is further enhanced by this report. Bottom line for the Nov report: reduced crop sizes in US production was offset by higher world production numbers, especially in soybeans and wheat.  

While the US production numbers were lower than trade expectations, the ending stocks numbers were higher than trade expectations for all three major crops (corn by 42 mb, soybeans by 10 mb, and wheat by 9 mb) in spite of lower crop sizes.  Demand was the culprit, lowered for all three grains, with the world supplying much of the shortage caused by poor US crops.  

World ending stocks were also hiked in this report, with wheat (+0.2 MMT) and soybean (+.6 MMT) stocks higher than last month. Coarse grains were reduced only slightly from last month, in spite of the U.S. cut in production.  Due to a attractive price of corn versus soybeans, Argentine corn production numbers were hiked 1.5 MMT to 29 MMT, with cuts in soybean production of 1 MMT as farmers there switch acreage to corn from soybeans.  

The switch from soybeans to corn should play out across the world in the coming year, as the soybean/corn price ratio is an astonishing low <1.8 level right now - a historically low number!  Of course, there is a reason for that distortion, as the U.S. corn crop was quite a bit smaller than the soybean crop.  Now it is up to the world's producers to respond to that call for more feed grain acreage at the expense of oilseeds (even the 2012, 2013, and 2014 crop price ratios strongly favor corn).  We note also that USDA hiked Brazil soybean production 1.5 MMT to 75 MMT due to excellent planting season weather thus far - an early revision indeed! 

Perhaps those numbers will continue to rise with excellent weather?

Overall, the outlook for grain prices remains that prices will be high, but the 'short crops have long tails' scenario might play out for U.S. producers this year, as demand continues to wane for U.S. crops amid a much improved production season in 2011 for the rest of the world's crop production.  

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