The biggest news affecting the market this past week was the USDA crop reports issued Monday morning, Jan. 12. The reports were bearish for corn and soybeans and mixed for wheat. Of the three, corn showed the most significant changes and that will be the subject of this week's article as I look at how the changes might affect the corn basis.

The USDA pegged U.S. corn production at 12.101 billion bushels, up 81 million bushels from the November estimate. The large estimate was a result of an increase in planted and harvested acreage as well as a 0.1-bushel increase in the average yield. The average trade guess for production was 11.975 billion bushels, 45 million bushels less than the November estimate.

Ending stocks were a surprise at 1.790 billion bushels, up 316 million bushels from the November estimate. This was a result of higher estimated production and lower expected use. The trade was expecting a modest increase of 15 million bushels to around 1.489 billion bushels.

Quarterly stocks as of December 1 showed corn at 10.084 billion bushels, 194 million bushels less than a year ago. The stocks estimate implies that corn use was 3.645 billion bushels for the first quarter of the 2008-09 crop year. Trade estimates were anticipating first quarter stocks to be around 9.845 billion bushels, 239 million bushels less than estimated. The lower-than-expected rate of use in the first quarter has resulted in USDA forecasting lower total use for the balance of the crop year. To accomplish this USDA reduced use in several categories. Feed and residual use was adjusted 50 million bushels downward to 5.3 billion bushels to reflect lower animal numbers. Food, seed and industrial use was projected at 4.9 million bushels, 135 million below the December forecast. Of that total, ethanol use was lowered to 3.6 million bushels, down 100 million from a month ago. Lack of profitability in ethanol production for the past several months along with other problems facing the industry make it difficult to justify running these plants. As long as crude oil and gasoline prices remain weak, demand for ethanol will be slack. Exports are now only expected to reach 1.75 billion bushels -- down 50 million bushels from December -- based on the pace of sales and shipments to date.

In addition to cutbacks in domestic use, world ending stocks need to be considered. World ending stocks for corn were estimated at 136 million metric tons, up 12.2 mmt from the December estimate. Increased corn production in China, the United States, Mexico, Russia and the EU-27 more than offset reductions in Brazil and Argentina. China and the U.S. accounted for most of the increase in world ending stocks. Corn production in China was raised 5.5 mmt and U.S. corn was up 8.0 mmt from the December estimate.

Initially, looking at the numbers the first response might be that basis levels have little chance of going higher and in fact will probably go lower. That may or may not happen depending on where futures trade. If the economy picks up and more speculative money filters into commodities, corn futures price will likely strengthen while basis levels weaken. On the other hand, if speculative money does not come back into the commodity markets then there could be more volatile swings in basis levels as demand steps in and out of the market. Looking at a basis chart, the 2008-09 basis appeared to be following the 5-year average trend line until the first week in December when trend started to look like the 5-year maximum line as basis levels improved. Even though basis levels are considerably lower than the 5-year maximum basis, there may not be much more upside potential given the current situation. With January's change in supply and demand numbers, the pattern will now likely move to a more average to 5-year minimum trend line unless of course futures prices move dramatically lower.

There is an adequate supply of corn available and demand is such that it can be easily covered with a sizeable amount left over. In addition, there is still plenty of cheap feed wheat available throughout the world to substitute for corn. The potential for large basis swings, at this point in time, is minimal. There will no doubt be times of surplus and tightness where the basis may gain a few cents and then give it all back. For continued basis strength there has to be strong demand over a period of time. Given the U.S. and world economies and the amount of corn and wheat available this crop year, that doesn't look likely. It is hard to fathom that any fresh demand could arise that we don't already know about.