August 12, 2011 USDA Supply/Demand Report is Bullish
The CME noted the USDA issued a particularly bullish August supply/demand report as corn and soybean production forecasts were well below the July estimates and on the low end of analysts pre-report guesses. The August report is always highly anticipated as it represents the first attempt to project corn production based on actual field observations.
It was even more so this year due to record high corn prices this summer and speculation that high July temperatures over much of the Midwest likely damaged the crop during the critical pollination phase. It appears that the USDA analysis of the crop so far confirms that the crop has sustained some damage. Corn yield for the upcoming harvest is now pegged at 153 bushels per acre, some 5.7 bushels lower than the July estimate and about the same as the dismal yield last year. The reduction in yields removed 556 million bushels or 4.2% from the previous estimate of US corn production. Corn supplies are still expected to be larger than a year ago due to more acres planted in corn.
USDA also reduced its estimate of corn harvested acres to 84.4 million, almost half a million fewer acres than the previous estimate.The ratio of harvested to planted acres now stands at 91.4%, compared to 92% a year ago and about the same level as in 2008. It is likely that the ratio of harvested acres to planted will decline as USDA fully accounts for the drought damage in the Southern Plains and surrounding areas.
Reductions in corn supply imply less product flowing through the main distribution channels, although how the supply will be allocated will depend on a range of factors unknown at this time, from the price of meat products at retail to fuel prices, exchange rates, and the pace of economic activity. USDA believes that feed use and exports will account for the bulk of the reduction in corn demand.
Feed use is now pegged at just 4.9 billion bushels, 150 million bushels lower than the previous estimate, 100 million bushels less than a year ago, and the lowest feed and residual number since 1995. The current estimate projects feed and residual use down 1.215 billion bushels or 20% since 2005. Increased use of DDGs has replaced some corn, especially in cattle diets. However, if USDA is right, current feed use estimates imply further contraction in US protein supplies for 2012.