The fireworks began at USDA at 7:30 am Cornbelt time and continued throughout the day at the Board of Trade.  When the final bell rang July corn was limit down based on USDA’s forecast for a 13.5 billion bushel corn crop and more left over the next two years than what the market had expected.  Unfortunately, commodities (except for feeder calves) all fell substantially and swept up the grain market as investors unplugged.  Is there such an animal as “turnaround Thursday?”

We begin with the USDA’s May Supply and Demand Report which estimated 2011 production at 13.505 billion bushels from 92.2 million acres at a 158.7 bushel average yield.  Due to price pressure, USDA reduced feed use by 50 million bushels to 5.1 billion bushels and reduced export demand by 100 million to 1.8 billion bushels.  With the 50 million bushel increase in ethanol use, USDA economists raised the carryover from 730 million to 900 million bushels in August of 2012.  That number was expected to possibly decrease and that is what caught traders by surprise. 

USDA plugged in a lower estimated yield number than the trend yield for the year, because of the slow pace of planting and the potential for lower yields from later planted corn.  The ethanol estimate is based on slow demand for motor fuel domestically, but greater export demand.  The lower feed use is a function of increased feeding of corn gluten and distillers grains.  The 900 million bushel surplus represents a 6.7% stocks to use ratio, compared with 5.4% for the current year.  The average price for corn in the coming marketing year will be $5.50 to $6.50.

The critics of the report have come out of the woodwork, not just questioning the carryover, but USDA’s expectation that 92.2 million acres of corn will be planted.  Significant parts of the Cornbelt remain unsuitable for fieldwork because of surplus moisture, even though Iowa’s planting progress of last week was the major headline at the outset of the week.  With difficulty in getting the first planting done from Indiana eastward and in the Dakotas, an estimated 3 million acres of farmland has also been inundated by the Mississippi River flooding.  With that water expected to remain for several weeks at some level, it will be nearly impossible to replant and still have a viable crop.  The litmus test of whether 92.2 million acres of corn will be produced will come on June 30 when the Planted Acreage report will give a good indication of success or failure.  In many years planting is still underway, but by that time there will be evidence of whether the 92.2 million will be near, or a great distance away. 

USDA’s estimate for soybean production was estimated at 3.285 billion bushels, based on a 43.4 bushel per acre trend yield on 76.6 million acres.  USDA nudged the domestic crush up to 1.655 billion, nudged the export estimate down to 1.540 billion and estimated the carryout at 170 million bushels.  That represents a 4.8% stocks to use ratio.  The national average price was estimated to range from $12 to $14 per bushel. 

The lower soybean production, compared to last year is 44 million bushels, from a lower harvested area.  The increased carryout is a function of lesser exports, even in the face of growing demand from China.  However, USDA believes the increased Chinese demand will be fulfilled by South American soybeans.

There are several authorities who have weighed in on the numbers released by USDA:
1) Darrel Good at the University of Illinois says, “The changes made by USDA were not a surprise.”
2) Chad Hart at Iowa State University says, “These projections show supplies that just meet demand or exceed it slightly. Higher prices and increased competition in global markets are expected to slow demand. But as these numbers show, that slowdown is not enough to prevent projections of record prices for the upcoming crops.”

Summary:
USDA’s initial projection at supply and demand for grain from the 2011 crop received a bearish market response, particularly from corn, which saw higher carryout from a billion bushel production increase.  USDA expects a lower average yield will result from late planting, but 92 million acres are still being estimated for new crop corn.  New crop bean production is based on 76 million acres of trend yield soybeans.  Both beans and corn will have relatively low carryout, but the corn surplus will rise to 900 million bushels by the end of August 2012, and beans will be 170 million.  The average corn price will be $6 and beans will be $13 per bushel.