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CATTLE TODAY

COMMODITY INSIGHT

by: Jerry Welch

The first look at the 2007/08 crop year was offered by the USDA this week in the May Supply-Demand report. Grain prices responded by rising sharply as the outlook for values was long term bullish. So bullish in fact, the instant I saw the report I asked myself, "Now, what is the worst that can happen?" Under the right circumstances I thought, " A lot." Here are a few highlights from the report and judge for yourself how important the report will be for US grain and livestock producers and the economy as a whole.

CORN

**New crop carryover will only rise 10 million bushels despite the largest numbers of acres planted to corn since 1944. And the ratio of corn stocks to usage will be a new, all time record low.

**Usage is pegged at 12.465 billion bushels compared to 11.575 last year.

**Average yield of 150.3, below trend line due to slow planting and and flooding in the Midwest.

**A price range of $3.10 to $3.40 a bushel, the highest price in history going into a new crop year.

**Ethanol use up 58 percent to 3.400 million bushels versus 2.150 last year.

**Ethanol demand will top corn exports for the first time in history.

**Global stocks of corn will drop to their lowest levels since 1983/84.

SOYBEANS

**US ending stocks to be down nearly 50 percent from a year ago due farmers switching acreage into corn.

**If US farmers repeat that maneuver in '09, end soybeans stocks will be near zero. Yes, zero!

WHEAT

**World ending stocks are 113.4 versus 120.4 this season and the lowest since 1981/82.

**Global stocks to use ratio is 18 percent, a record low due to tightening supplies.

**World usage of corn and coarse grain is the third largest year-to- year increase in history.

COURSE GRAINS (cereal grain other than wheat and rice)

**World coarse grain stocks fell another four million tons despite a rise in production of 82 million tons.

**The upcoming season will be the tightest world coarse grain Supply-Demand balance sheet in history.

OVERALL GLOBAL DEMAND FOR GRAIN

**World grain production has lagged usage in eight of the last nine years.

The Supply-Demand report underscores the need for perfect growing conditions this summer across the globe as there is little room for a supply shortfall. Statistically, any serious drop in existing or projected grain supplies will force the market into a price rationing rally historic in scope. Already this season, a freeze has damaged US wheat, flooding is seen in the Midwest and signs surfacing the coming summer will be hotter and drier than normal. The season is not off to the best of starts! Months ago, I argued the grain complex was out of balance. It lacked equilibrium. I based that outlook on the battle waging between those that want corn for fuel and those that want it for food. With American farmers switching a record amount of acres into corn at the expense of other grains, there is even less balance in the grain complex. Which could, under the right circumstances, be very bullish for prices.

WHAT IS THE WORST THAT CAN HAPPEN BASED ON THE SUPPLY-DEMAND REPORT?

**Soybean acres are far fewer this year than last and supplies so tight that a one bushel drop in yield this season should send new crop prices to $9.50 a bushel. A two bushel drop should lead to $10.50 a bushel soybeans. And a drop of three bushels per acres and "beans in the teens" is possible.

**If the soybean-corn ratio holds at 2 to 1 or 2.1 to 1 level it suggests; $9.50 a bushel soybeans means $4.75 a bushel corn; $10.50 soybeans means $5.25 corn; "beans in the teens" hints of $6.50 corn.

**For 2008/09, another five million acres have to be placed into soybean production to keep stocks from falling to zero. For that to happen, it has to come from corn. But the food/fuel battle being waged in corn will not allow that to happen easily. Otherwise, corn stocks will decline to dangerously low levels as well. Murphy's law is a popular adage that says things will go wrong in any given situation, if you give them a chance. With the grain complex out of equilibrium a lot can go wrong. Just give it time.

(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)

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