Corn and soybean prices have dropped sharply since the United States Department of Agriculture (USDA) issued its November Crop Production Report, which contained a smaller forecast of the size of the 2011 harvest for both crops.

The recent price behavior of corn and soybeans suggests that the market believes the combination of very high prices in the late summer and early fall and weaker demand prospects have been sufficient to ration the relatively small crops.

Weaker export demand prospects result from a combination of increased competition from other exporters and concerns about world economic and financial conditions. For corn, the competition is from the large corn and wheat crops in 2011 while soybean export demand is being influenced by prospects of another large South American harvest in 2012. While world financial conditions are deteriorating, the impact on world grain consumption may be over stated. The record large exports of U.S. pork and beef in the face of record high prices provide evidence that world demand for food remains very strong. Foreign crop production prospects will dominate the outlook for U.S. crop exports.

U.S. demand prospects for corn are still mixed. The present demand is very strong, as ethanol production climbs from its pace of a year ago and record hog and cattle prices, along with large feedlot inventories of cattle, support feed demand. For soybeans, the pace of the domestic crush was very slow in the first two months of the marketing year, reflecting a slower pace of meal and oil exports.

While the markets will likely keep on reflecting the changing demand prospects for the 2011 crop, the potential size of the 2012 U.S. crops will begin to have more influence as the new calendar year begins. Prospects for the 2012 crop start with expectations about planted and harvested acreage for all crops and for individual crops. Anticipating total planted acreage is difficult, as that planted acreage varies considerably from year to year. In general, an increase in total acreage is pegged for next year because of the large area of prevented plantings in 2011.

Source: www.farmdocdaily.illinois.edu