Calculated feed and residual use of corn for the 2010-11 marketing year is unreasonably small. The estimate of large Sept. 1 stocks also appears at odds with the ongoing very strong corn basis.

Explanations offered for the surprisingly large Sept. 1 stocks include the possibility that the 2010 corn crop was under-estimated and/or the amount of corn used for ethanol production has been over-estimated.

"If correct, either of these explanations would result in a larger calculation for feed and residual use and might make sense if the September stocks estimate was the only one available for the year," he said.

"However, neither explanation is consistent with the level of stocks on Dec. 1, 2010 or March 1, 2011.”

In addition, the size of errors implied by these explanations would have to be very large to result in a reasonable calculation of feed and residual use for the year. Some speculate that stocks of the newly harvested crop were included in the estimate of "old crop" stocks.

Such an inclusion would require unique reporting errors by survey respondents, and those errors would have to be very large to result in a reasonable calculation of feed and residual use in the last quarter of the year.

There is not an obvious problem with USDA methodology that has produced reasonable stocks estimates until recently.

"The implied low level of feed and residual use last year complicates the forecast for the current year. Use might be expected to decline in 2011-12 due to a combination of unchanged hog numbers, declines in broiler chick placements, declining cattle feedlot inventories starting in early 2012, and a stable supply of distillers' grains. But will use really decline from the extremely low level implied for 2010-11?" he asked.

Corn prices declined after the release of the Sept. 1 stocks estimate, but were already under pressure as a result of concerns about U.S. and world economic conditions and a general decline in commodity prices (excluding livestock).

In addition, the corn market has been influenced by reports of better-than-expected yields. It is yet to be determined if "better than expected" translates into "higher than forecast."

The USDA will release new corn production and consumption forecasts on Oct. 12.

"The recent decline in corn prices has resulted in profitable margins for almost all users of corn, suggesting that prices are low enough to encourage an increase in consumption. The USDA's October reports will provide a new benchmark for evaluating consumption.

“After that, weekly estimates of exports, ethanol production, and broiler placements will provide information to gauge the pace of consumption relative to projections and to judge the price level," he said.