Next Thursday is the January supply and demand report. I always get a kick out of USDA calling it the “Final” report since it is supposed to be the final estimates for grain production, but unfortunately that isn’t the case far too often. One thing we can be sure of however, is that there is a very good chance that we see a great deal of market volatility following the report. For five consecutive years there have been limit moves in the corn following the report. Some of the moves are up and some are down, it will just depend on the USDA numbers.

Many analysts are expecting to see small production cuts for the corn and soybeans. Often when we see yield cuts in the fall there is also a downward revision in the January report as well. There are reasons why basis levels are strong and the bull spreads are working so well in the corn and one of those reasons could be that we just don’t have as much corn on hand as expected.

On the demand side I don’t expect to see many, if any, changes to the corn, wheat, or soybeans. There have been numerous adjustments of late and I think USDA will leave demand alone for the most part and let some more time pass to see if we have better demand in 2012.

We could be in for some big changes when it comes to the world numbers. S. American corn and soybean production will likely see significant cuts due to the drought conditions. It is hard to say how fast USDA will try to get in line with private forecasters, but my guess is that USDA will take a cautious approach. None the less, they should still make a sizeable cut next week, Which could be the first of many.

The grain markets started the week higher based on the dry forecasts for Argentina and southern Brazil, but the combination of a little bit of moisture in the forecast for next week, over bought markets, and strength in the US Dollar led to corrective activity. The wheat market was the big loser, which shouldn’t be a surprise. The wheat is dependent on the corn market for strength at the moment due to the lackluster demand for US wheat. If the corn isn’t moving higher, there isn’t much reason for the wheat to move higher. The March KW lost 35 ¾ cents for the week and the March Chicago wheat lost 28. Both markets were about 50 cents off of Tuesday high.

The corn market fared much better. The March contract only lost 3 cents. There is real concern out there that we will see a production cut in the report next week and significant cuts to S. American production that will suggest better US exports later in the crop year. We are already projected to have the 2nd tightest stocks to use ratio in modern history and it is still conceivable that we will have the tightest. The world stocks to use ratio is the tightest since the early 1970’s and will only get tighter. Although world corn production will still be record high even with a big cut in S. America, world demand will also be record high and will probably be greater than production. It is still easy to make a bullish case for the old crop corn and we will continue to see the bull spreads work.

The soybeans were stuck in the middle of the wheat and corn with the March soybeans losing 11 cents. Rains would benefit the soybean crop more than the corn at this point, which makes the soybeans more vulnerable to profit taking. However, if we don’t see a change in the weather pattern soon there will be significant crop losses. It looks like the world could easily see a 15% drop from the record high ending stocks we had last year. That would have a definite bullish impact on supply and demand balance sheets around the world. Our exports would likely improve, which would suddenly make our acreage battle this spring much more interesting.

Cash cattle traded at $121 this week and the February LC lost $1.10. The live cattle market is becoming oversold, but it looks like the February contract is headed to the $119.65 area before it makes a turn around. The long term fundamentals of the cattle market are still bullish, but the beef market seems to be finding overhead resistance at the $190 - $195 area, which could be a limiting factor to live cattle prices as we move forward. April call options are the best way to play the long side of this market.

Meanwhile the feeder cattle made new highs this week and there doesn’t seem to be anything that will stop that market. If we do see a turn in the live cattle next week, plan on a surge in the feeders.