The USDA’s October report, issued yesterday, has given way to speculation on the November report even before the ink has dried! The much-awaited report was construed as bullish and markets reacted accordingly with sharp gains across the soy complex, corn and wheat.

The trade received an unexpected surprise with a cut in 2011/12 world corn production and stocks although the 2012 corn and soybean production estimates were close to expected levels although harvested acres for both crops were increased as expected.

The much-debated US corn yield figure was reduced marginally to 122.0 bu/acre from 122.8 and soybean yield increased, as expected, to 37.8 bu/acre from 35.3. However, as is so often the case, as you dig deeper into the report all is not quite as we may be persuaded to believe!

As Rob Fisher, Managing Director of IAG, pointed out so eloquently at the seminar which preceded the Hull Corn & Feed Trade Association Dinner in Hull yesterday, the incredibly tight global S&D position is predicated upon some massive production increases in both Brazil & Argentina. The figures call for a 22% increase in Brazilian output and a 34% increase in Argentine output. These sorts of increases seem to be disproportionate and we ask the question, “Were these numbers inserted to balance the books?”

Clearly, we do not have the answer, but believe that demand rationing through higher prices is essential if supplies are to last throughout the season. Consequently our view remains bullish going forward and gaps in cover should be filled even though current prices may seem to be unpalatable right now.

In corn, which has a direct correlation with wheat, we would expect the next report, (yes, we are guilty of looking at that one before the ink has dried too!) in November, to show further declines in output as all the acres chopped for forage are currently counted as “crop”. Consequently, as the true crop is harvested and recorded we would expect to see overall output lower than currently stated. In past years this has been a feature more often than not and we see no reason for this to change this year.

We therefore hold a similar view on corn as we do on the soy complex, that being bullish.

World wheat stocks were reduced from a month ago by nearly 4 million mt, which was close to expectations and output reduced by 5.7 million mt. However, the greater impact upon prices will likely come from the larger market place and international trade. We know that Russia is pretty much done in terms of exports this season and seemingly there is little Ukraine material available for export. France has picked up the lion’s share of recent Egyptian tenders and will soon deplete its exportable stock leaving the US as the major supplier to importing nations.
Australian weather shows little sign of improvement and the prospect of a sub 20 million mt crop is not too far away; this will clearly impact their export capability further pressuring prices going forward.

As mentioned earlier, we expect the major price driver to come from corn prices and our outlook is bullish. We would recommend cover to be in place through to the end of this crop year as we expect another tight end of season as far as stocks are concerned.