Chicago, 12 May 2010

The U.S. Agriculture Department's supply-demand report on Tuesday (11 May) underscored that there will be ample supplies of corn and soybeans in the United States next year, which could cap rallies in futures prices. * In its first forecast of U.S. corn and soybean ending stocks for the 2010/11 season (Aug/Sept), the USDA pegged corn supplies as of Aug. 31, 2011, at 1.818 billion bushels, the largest since 2005/06. Soybean stocks were pegged at 365 million bushels, the most since the 2006/07 season.

* USDA projected world corn output in 2010/11 at a record 835.03 million tonnes, up from 808.57 million in 2009/10.

* The caveat to prospects for bulging U.S. grain stocks next year is that fledgling corn and soybean crops planted this spring in the United States continue to enjoy favorable weather during the critical development stages this summer.

* After two straight years of wet spring weather delaying the seeding of the corn and soy crops, the weather this year has been ideal, allowing for farmers to sow their corn crop at a record pace, and plant soybeans at the fastest clip in six years.

Impact on Markets

From a fundamental standpoint, ample supplies of corn and soybeans in the United States would cap any long-term rally in Chicago Board of Trade futures for both the commodities. CBOT corn futures have tumbled about 15 percent since the USDA's January crop report which raised its estimate of 2009 U.S. corn production to 13.151 billion bushels, from its December estimate of 12.921 billion – topping analyst estimates for 12.82 billion bushels.

Tuesday's report, which pegged 2009 corn production at 13.11 billion bushels, will continue to keep a lid on CBOT futures prices over the long term, but there could be underlying support from growing demand from the ethanol sector.

The USDA raised its estimate of corn usage by the ethanol sector in the 2010/11 season to 4.6 billion bushels from 4.4 billion bushel in 2009/10.

The department also raised exports estimates for 2010 to 2 billion bushels from 1.95 billion in 2009. There are, however, several elements that can change this scenario of large stocks. Summer weather is crucial for the development of both the corn and soybean crops. Corn goes through the pollination stage, which determines yield, in July, while soybeans set pods in August. In both instances, crops need rains and warmth.

Any break in the weather toward dryness and high heat could fire up the markets, as did excessively wet weather in the spring of 2008 when prices for grains hit record highs.

What Other Factors Are At Play?

For corn, another crucial element that can provide nearterm support to CBOT futures is demand from China – the world's second-largest consumer of the feedstock that is needed to feed the country's fast-expanding hog herd.

The corn market was invigorated two weeks ago by China's first purchase U.S. corn in four years. Since the initial 115,000 tonne purchase, no further sales have been confirmed to China. However, there has been relentless talk in the market that Chinese feed-makers had bought up to 600,000 tonnes more.

Further purchases will depend on how China's corn crop being planted this spring turns out and if the weather cooperates. Future sales will also hinge on whether or not China is able to put a lid on rising domestic corn prices through sales from state coffers and whether Beijing will give up its goal of being self-reliant.

For soybeans, the rider is again on China, the world's top importer of the oilseed and the top U.S. customer. The Chinese economy is off to a healthy start in 2010, growing at a seasonally adjusted 12.2 percent in the first quarter, up from 11.3 in the fourth quarter of 2009. If its yuan currency strengthens, as expected, China's buying power – especially of dollar-valued soy -- will rise.

Dollar on the Rise

The value of the dollar has significant impact on U.S. grain markets due to the fact that the United States is the top exporter of corn, soy and wheat and any movement in the greenback will influence the trading dynamic. The dollar index has surged about 4 percent year-to-date but there could be volatility ahead amid the $1 trillion emergency package to stabilize the euro.

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