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USDA weighs in

USDA has weighed in on the big bull market of 2010/11, with its most recent report in February showing even tighter corn stocks led by improving demand at a time when demand needs to be allocated among various uses.  But instead, we saw a cut of 70 mb (about 10% of US ending stocks) corn due to increased demand, mostly the 50 mb hike in ethanol use.  So much for allocating our short supply!

USDA also weighed in with their long term estimates for the coming 10 years, with the greatest importance the near term projections (how are they going to solve our current tight stocks scenario???).  They did it in one respect by projecting much higher cropland acreage for 2011, including another 10 million acre hike in projected planted acreage, reaching 255 million acres in 2011 vs. 245 million in 2010.  This surprised the trade Tuesday, bringing prices crashing lower for corn, soybeans, and wheat (but most emphatically in soybeans and wheat).  This projected acreage is above even the large acreage in 2008, the recent high at 253 million acres.  While USDA projected leaving the CRP acreages alone, this still left planted acreage at a high 249-250 million acreage for the entire 10 year projected period remaining. 

While demand remains highs for ethanol use, USDA also projects ethanol use gains to slow into the next 10 year period, slowing considerably in the coming years with it basically plateauing in 2010/11.  The minimal growth keeps the corn market from imploding, and that is a key projection in the coming years that keeps the US corn balance sheet in line, and that is even keeping the current US 45c per gallon tax credit available to blenders of ethanol and the 54c per gallon tariff on imported fuel ethanol through the end of the projection period. 

USDA also projects relatively strong wheat prices and expected net returns to boost wheat plantings in 2011, but declining late in the period to about 51 million acres by the end of the projection period.  They envision Russia recovering significantly in future years, with the US finding significant competition from the Black Sea region in world exports such that the US market share for exports declines from 27% of the world market to only 16% by the end of the 10 year projection period.  Russia's wheat exports are projected to rebound from drought reduced lows in 2010/11, rising to near 15% of global wheat trade by the end of the decade.  The EU market share also declines from 17% in 2010/11 to only 14% in 2020/21. 

US soybean plantings rise over the projected period, using up much of the declining wheat acreage as growth in domestic and export demand keep prices and producer returns favorable.  Meat production gains are expected to resume, and therefore the need to crush beans for meal will also increase.  Strong global demand for soybeans, especially China, supports increases in US soybean exports.  Despite rapid growth, though, continued competition from South America, especially Brazil, leads to a reduction in US share of global soybean trade from 44% in 2009/10 to about 37% in 2020/21.  Strengthening competition from South America in both meal and oil trade results in a shrinking in export market share in these products as well. 

While a number of short term factors have led to higher prices in 2010/11 (led by the Russian 2010 drought), market responses to these high prices (higher projected production) are projected to reduce prices over the next several years.

However, prices will remain historically high (from $4.10 to $4.25 from 2013 through 2021 corn after averages of $4.80 in 2011/12 and $4.30 in 2012/13).  That compares to $5.20 in 2010/11, when prices are expected to be the highest of the 10 year period.  Similar price responses are projected in wheat and soybeans, with 2011/12 averaging $6.50 wheat, and then declining to $5.90 in 2012/13 and to $5.45-$5.60 for the remainder of the 10 year period.  Soybean prices also will peter out to end the decade, dropping from $11.45 in 2010/11 to $11.20 in 2011/12 and $10.55 in 2012/13 before leveling out at $10.20-$10.35 for the remaining 8 years to 2021. 

It seems that USDA is telling us that 2011 will be our best year in the next decade as the market has a need to try to attract higher production and to ration demand in the coming year.  But once accomplished, we can expect prices to level off at lower levels.  Perhaps the opportunity to commence selling a good share of the coming 3-4 years of crops will come along in the coming months leading up to planting the 2011 crop???  Stay tuned, as the marketplace is now the one who is going to speak, and that will be much louder and clearer than USDA over the coming months once the smoke clears!

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