The September Supply and Demand Report came out almost exactly as expected. USDA is now projecting a record US corn yield of 161.9 bu./ac. and a near record soybean yield of 42.3 bu./ac. It seems like as soon as the August Supply and Demand report was out traders were already talking about the probability of seeing a record high corn yield estimate in the September report. With no threatening weather for the past month and with crop conditions not making their normal seasonal decline, a yield increase had to be expected.

A record corn yield estimate is bearish, but the rest of the numbers in the report weren’t all that bad. USDA increased the feed usage estimate and the export estimate which put total demand at a new record high of 13.025 billion bushels. The increase in demand also meant that the ending stocks estimate only grew by 14 million bushels to 1.635 billion, which is still below last year. So, if all the current estimates are correct, we will have a record yield, but less corn at the end of the year. That isn’t terribly bearish considering the current price level. As long as the yield estimate doesn’t go up next month, the worst the December corn will probably do is test last year’s low of $2.90. If Informa is right and we end up at 168, well, then we are going to $2.60, but we will also probably set a record for exports and the ethanol industry will be printing money. Right now, a bounce back to the $3.30 level in the December corn is a definite selling opportunity.

The soybean report had several interesting changes and non-changes. Old crop exports were increased to a new record high of 1.280 billion and there was a corresponding cut in residual usage so that ending stocks were left unchanged. New crop exports were also increased to 1.280 billion and crush was increased by 20 million bushels, which was nearly enough to offset the yield increase. Ending stocks increased by 10 million to 220 million bushels. 220 million is a more than comfortable level of ending stocks, but since we have already sold nearly half of the export estimate there is a strong possibility that the export estimate will continue to grow. The strong demand gives the soybean market good upside potential once we get past harvest. That is especially true if USDA’s yield estimate happens to be too high. After all, we have to keep in mind that crop development is behind normal and the skeptics keep pointing out that the crops are still way behind on growing degree units. The problem is that we need to get past harvest and find out what the yield really is and if the demand is going to keep up, so in the mean time look for more pressure in the soybeans.

There were no changes to any of the wheat numbers, but I would look for a few next month. Unless the export market improves there will probably be a cut in the export estimate. I also think there is still potential for a production increase sometime in between now and the January report. There is little positive news to report in the wheat other than the facts that the market is very oversold and due for a correction and the wheat posted a reversal higher on the charts Friday. There is typically some follow through after a move like that, so I look for some strength in the wheat next week. However, I think the strength will create a better opportunity to sell call options.

Cash cattle traded in Kansas at $85. Not quite the $87 that was asked for early in the week, but an improvement none the less. The futures charts aren’t giving me a lot of confidence and the beef market is flat, which isn’t helping out either. The number of cattle available has to be shrinking though, so if the packers want to keep killing cattle they should have to bid up to get them. The fundamentals give me some hope and if we were to get a strong technical signal to buy futures I would go with it aggressively.

Perhaps the most interesting market development of the week was the sharp decline in the US Dollar Index. The Index fell below trend line support on Tuesday and although the Dollar is probably due for a corrective bounce, everything is pointing to further weakness in the long run. Look for a test of the 2008 low sometime in the next few months. The recent break in the Dollar hasn’t helped the grain markets much lately, but perhaps it is supporting the market more than we realize. The net long Index fund position continues to grow in the corn and the gold market is testing all time highs. Those are two good indications that there is still a fear of inflation in the general public. If the grains start to turn higher we may start to hear more talk about the weak dollar.