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Tighter Supplies Spark a Rally in Commodity Prices

posted on January 14, 2011

Grain and oilseed prices rallied dramatically Wednesday after the Agriculture Department released its much anticipated annual crop production summary; and its latest estimates on U.S. and global supply and demand.

To almost no one's surprise, USDA reduced its "guesstimate" on 2010 U.S. corn and soybean production. But the degree of the adjustment caught some of the trade off guard.

Combine decreased production with already tight supplies and you have a classic recipe for higher prices.

Tighter Supplies Spark a Rally in Commodity Prices

As expected, the Agriculture Department reported this week that U.S. farmers produced considerably less grain in 2010 than it had originally predicted.

According to USDA, 2010 corn production will amount to 12.45 billion bushels. That's down 1.5 bushels per acre and half-a-billion fewer bushels than the record crop produced in 2009.

U.S. Soybean production also was curtailed. The government now pegs 2010 production at 3.33 billion bushels on an average yield of 43.5 bushels per acre. Both the total harvest and yield estimates trail last year's record soybean production numbers slightly.

Turning to its monthly supply and demand estimates, USDA reduced domestic corn ending stocks to 745 million bushels, reflecting a 1.5 bushel per acre reduction in yield, and a 100-million bushel INCREASE in the amount of corn used to produce ethanol.

Analyzed as a percentage of demand, the numbers add up to a razor-thin stocks-to-use ratio of 5.5 percent. That's the tightest corn stocks-to-use ratio in 14 growing seasons, and it leaves little cushion for increased demand or production shortfalls.

U.S. soybean ending supplies also were forecast to be tight at 140 million bushels...down 15 percent from December estimates. An accompanying U.S. soybean stocks-to-use ratio of 4 percent is small historically, leaving little room for crop adversity in South America.

And U.S. wheat carryout is estimated at 818 million bushels... down more than 16 percent from last year's final stockpile. The domestic wheat stocks-to-use ratio of 33 percent is high compared to that of corn and soybeans. But GLOBAL supplies remain tight and are expected to support wheat futures prices.

The reports sent the bears back into hibernation Wednesday as wheat, corn and soybean futures contracts all traded sharply higher on the news.

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