Washington, 12 August 2010

The USDA's latest batch of numbers suggests that U.S. producers look set to churn out record amounts of corn and soybeans this fall -- as well as the third largest wheat crop since 2000. But overseas production hiccups matched with blossoming global demand should counteract the impact of mammoth fresh domestic supplies -- and continue to underpin global grain and oilseed prices.

RECORD CROPS NO BIG SURPRISE

Early planting dates combined with friendly growing conditions were widely known to have been conducive to both the US corn and soybean crops in recent months, and weekly crop rating reports have generally conditioned market-watchers to expect close to record-high output totals.

Still, some pedantic soybean crop followers will no doubt point out that the crops emerging in the U.S. Delta area are struggling to cope with the recent heat stress -- and so may claim that a repeat of 2009's record-high yield of 44 bushels an acre may prove tough to achieve.

That may be the case, but the USDA's latest assessments -- based on close scrutiny of test plots throughout the key growing areas -- suggests that the overall soybean crop looks in rude health as it pushes through its key pod-fill growth phase.

The same too applies to corn, which is now through its most delicate pollination phases and so is on the home stretch in terms of growth completion. So while fields in the southern United States may still see some yield curtailment due to the hot conditions there, producers overall look set to deliver hefty U.S. soybean and corn crops in the fall.

CORN & SOYBEAN LONGS BAILED OUT BY EXPORTS

Traders entering Thursday's report hoping for downgrades in U.S. crop sizes due to the recent hot spell were unpleasantly surprised by the USDA's take on the state of the crops, which projects record corn and soybean production of 13.4 billion and 3.43 billion bushels respectively.

However, the USDA's aggressive revisions to the global consumption picture look set to compensate for the abundant fresh supplies, and potentially set the stage for a renewed period of price strength over the near term for those crops.

Inventories of corn declined both domestically and globally, while usage was increased to improve that commodity's stocks/use ratios on both the home and overseas fronts.

World soybean stocks also declined to reflect continuing strong global consumption interest, while U.S. inventories remained flat but could head lower should the current hot spell in the U.S. Delta growing region impact yields in that area.

All told, a brightening global demand picture helped corn and soybean longs dodge a major production bullet in Thursday's report, and could well fuel increased bullish enthusiasm here down the road.

WHEAT GOING GLOBAL

Despite a hefty increase in U.S. spring wheat output projections versus a month ago, the main theme for wheat now is how the market grapples with the change in sentiment driven by wheat's apparent transformation within the past two months from a commodity burdened by oversupply to a crucial food staple underpinned by burgeoning global consumer demand.

The initial driver of this turnaround has obviously been the heavy production losses seen in Russia, Europe and the Black Sea area, but the rejuvenation of end-user demand is what gives the recent tonal change its staying power.

For most of 2010, wheat importers were faced with multi-year high global inventories, and so were somewhat complacent in terms of acquisitions and stockpiling. Now that Russia has shut its export channels for the immediate future, however, major importing nations have jumped to life and are now openly competing with one another for strategic access to wheat reserves outside the 'bread basket of Europe.'

This spike in importer interest has not only transformed wheat from a regional to a global marketplace, but has at the same time shifted consumer and producer behavior from a short-termist approach to a longer term focus. Together, this global emphasis on longer term strategic requirements looks set to continue fuelling heightened consumer nation jockeying, and should help near-term and deferred wheat prices avoid aggressive slumps for the foreseeable future.

Altogether, Thursday's batch of numbers from the USDA highlights that a shift in focus is underway from concerns about apparently abundant regional supplies to the potential scale of growing global consumer demand. As to how this consumer demand will hold up as crop prices push higher as a result remains to be seen, but for now the renewed emphasis on demand rather than supply should underpin crop values for the foreseeable future.

Ends --

By Gavin Maguire, Reuters market analyst - for Commodities Now.

The views expressed are his own.