A larger-than-expected decline in U.S. corn crop and its December 1 stocks, along with a surprising drop in U.S. winter wheat seedings in the main Plains wheat producing states last fall, led to limit up price reactions to the U.S. Department of Agriculture's (USDA) January 11 reports. The USDA also updated its 2007/08 U.S. and world supply/demand reports which influenced CBOT prices.

Even with expectations of a smaller corn crop, the USDA's final output being down 94 million bu. to 13.074 billion vs. a 60 million average drop caught the trade's attention. The USDA's 1.9 bu. reduction in the U.S. corn yield to 151.1 bu. was also a surprise, with the top seven states' yields slipping 3-5 bu. from their November update. The biggest decline occurred in WCB with 3.6 bu drop to 152.8 bu.-10 bu. less than September's regional average. The ECB was down an average of 1.7 bu. to 157.6 bu., but the SE's yields rose 4.7 bu. when results were better than expected in their drought fields. Countering these lower yields was this year's stronger U.S. harvesting pace, resulting in a 471,000 larger harvested area vs. November-as producers gather all their output even on marginal acres this year.

This month's lower crop also contributed to a lower-than-expected December 1 quarterly corn stocks level of 10.27 billion bu.-280 million below the trade's average expectations. These smaller supplies implied that last fall's feed demand was larger than expected at 2.415 billion, which was an 11% rise from 2006. This prompted the USDA to raise its 2007/08 feed forecast by 300 million to 5.95 billion this month. Livestock and ethanol end users (accumulating supplies during harvest) had some impact last fall, but this year's expanded southern harvest in August probably short-circuited supplies into livestock and export channels. This left old-crop stocks to raise September supplies, while this larger output wasn't around to be counted on the December survey. Overall, even with strong livestock numbers through the first half of the year, current prices will probably ration 100 million from this feed demand later in the year, and larger corn distillers dried grains supplies will become available. The past month's price strength could also have sliced 50 million to 100 million of corn's energy demand, unless ethanol prices get reinvigorated after slipping back to the low $2 per gallon level.

The other big surprise was the lack of expansion in U.S. winter wheat plantings, despite record prices during last fall's seeding period. Overall, this first survey revealed that hard red winter's seeding was down 440,000 acres from 2006, while soft red winter's area was up 1.85 million and white wheat's fall plantings were up 250,000. Dryness in the western and southern plains slowed seeding there, but a 900,000 drop in the three major producing states of Kansas, Oklahoma, and Texas after last year's 1.45 million jump in the same states caught everyone off guard. Given that three out of the last six years, additional winter wheat acres have appeared on later surveys and the market has reacted quickly to lift spring wheat prices, we anticipate U.S. wheat plantings will reach 63.5 million-despite just a 1.623 million acre jump on this first report. December wheat stocks at 1.128 billion (12 million higher than expected) also prompted 10 million bu. cut in wheat's feed demand this month.

U.S. soybean output was also lower on the latest USDA report, but its decline was a very modest 9 million to 2.585 billion bu., resulting in a 41.2 bu. national yield. The harvested area held its own vs. 38,000 decline in seeding, but yields slipped both in the WCB (.4 bu) and Delta (.9 bu) on late season dryness. No changes were made in U.S. demand levels, resulting in 10 million drop soybeans and beans ending stocks to 175 million. But the USDA did cut its Brazilian soybean crop estimate from 62 mmt to 60.5 mmt, because of indications that last fall's early season dryness reduced its seedings by 500,000 hectares-cutting this year's expansion from 6.3% to 4%. However, Brazil's growing season has been good, and Argentina had recent rains last week after a dry period that possibly nipped some corn production.

The CBOT's quick and dramatic action after this report-with old and new crop corn, new crop soybeans, and new crop KC wheat prices all opening at their limit values-was likely the opening salvo in a price battle for acres between the three major crops in the U.S. With less old-crop corn, it can't give any more acres to soybeans that still need more acres, after Brazil didn't raise them. And hard red wheat's lack of plantings keeps spring wheat firm for more acres. This battle could rage until the March 31 planting intentions, so hold sales with new-crop potential to $5.80-$6.00, $14.50-$15.50, $8.75-$9.00, and $9.50-$9.75 range in Kansas City.