The Agriculture Department’s December crop report shows continued tight supplies of corn, cotton and soybeans that will help drive planting decisions next year, according to the American Farm Bureau Federation.

“Grain stocks weren’t reduced as much as we had expected, with USDA only making minor adjustments to the corn, wheat and soybean balance sheets,” said AFBF Economist John Anderson. “USDA did, however, lower its cotton stocks forecast to 1.9 million bales, compared to 2.2 million bales in last month’s report. That’s a drop of 300,000 bales in ending stocks, which is a significant drop given how low stocks already were.”

The USDA report indicates supplies of the three crops will be tight going into the new year. That points to strong demand, higher prices and an increase in corn, cotton and soybean plantings in 2011, according to the AFBF economist.

Anderson said that USDA’s minimal change to the corn stocks forecast was a surprising point from the December report.

Demand has been strong

“For the past few weeks, corn demand has been very strong, driven mostly by record high ethanol production,” Anderson said. “Ethanol production has continued to trend upward in recent weeks, and we would have expected USDA to show a small drop in the corn carryover level, or at least some adjustments within the various corn-use categories, but they didn’t. They basically stayed put with the demand side of the corn balance sheet.”

In the December report, USDA boosted carryover corn stocks to 832 million bushels from 827 million bushels, with the change being driven by an increase of imports by 5 million bushels to 15 million bushels.

“There was quite a bit of disagreement in the private pre-report estimates of corn ending stocks, but the general consensus was that stocks would fall by around 20 million bushels, so the 827 million bushel figure is a surprise,” Anderson said. “USDA may be expecting demand for ethanol to slow down, but higher oil prices and a generally weak dollar may continue to support strong ethanol production.”

Still, the AFBF economist stressed that the corn supply remains very low, at a 6-percent stocks-to-use ratio.

“The market would be very uncomfortable with corn stocks much lower than that, so we expect to see corn prices remain fairly strong overall, even if the short-run reaction to the report is kind of bearish,” Anderson said.

As for soybeans, USDA showed a sizable drop in the stocks levels, from 185 million bushels estimated in the November report to 165 million bushels in the December report.

“The tight supply situation in soybeans may encourage farmers to plant more beans next year, but with corn and cotton stocks also very low, competition for acreage will be intense,” Anderson said.

USDA’s projections suggest that competition for acres will be particularly strong next year as they actually cut back on cotton stocks — and raised cotton price projections — in the same report.

“Lowering cotton carryout to only 1.9 million bales is going to make for volatile conditions in a market that has not shared the fireworks other commodities have seen in the last few years,” Anderson said.