Grain futures are sharply lower across the board as traders had positioned themselves for shortages because of Midwest flooding and increasing demand from emerging markets and China.

Instead, corn stocks were 11 percent bigger than analysts expected and a bumper crop could be on the way according to the report.

Please consider Grain markets plunge on US acres, stocks

The U.S. corn supply is far larger than thought and a bumper crop could be on the way, the Agriculture Department said on Thursday in a report that shocked traders and shoved grain markets sharply lower.

Farmers defied expectations by planting significantly more corn acres despite rain and floods, and sky-high prices curbed demand which left June 1 stockpiles 11 percent larger than traders had predicted.

The dramatic turnaround from fears of bare-bones supplies could signal comfortable supply levels for the coming year and ease fears about high world food prices.

“American producers stepped up,” [USDA’s] Vilsack told Reuters Insider.

At the Chicago Board of Trade, corn for July delivery was down 10 percent, or 72 cents per bushel, at $6.26 in morning trade, and deferred contracts were locked down the limit of 30 cents per bushel. The July contract is in its delivery period and trading without limits.

July wheat was down 8 percent, or 49 cents, to $5.92-1/4. July soybeans were down 1 percent, or 19 cents, to $13.15-1/4.

Red-hot demand from corn exporters, livestock feeders and processors had been expected to consume every bushel grown in 2010 and eat into reserves, but the higher stocks number was a sign that demand has been rationed.

“We planted more acres than the trade had thought earlier in the year because we sent the signal to plant,” said analyst Don Roose of U.S. Commodities. “The other thing was, we did find a way to slow down usage.”

The USDA said the corn stockpile was 3.67 billion bushels on June 1, and it pegged plantings at 92.28 million acres. With normal weather and yields, a record-large crop could be harvested.

The soybean stockpile was 4 percent larger than anticipated by analysts, although plantings were 2 percent smaller. The soybean crop would still be the third-largest on record, but supplies are expected to run tight for another year.

Wheat stocks were 4 percent larger than traders expected and plantings were down marginally.

The USDA reports imply that corn growers would harvest 13.5 billion bushels of corn, which would be a record, and 3.2 billion bushels of soybeans, which would be the third-largest on record. Both estimates are Reuters’ calculations and assume normal weather conditions and yields.

A mammoth crop would fatten the corn stockpile to nearly 1 billion bushels, but soybeans would run tight through fall 2012.

Grain Futures

December corn was limit down 30 cents. However, front month contracts are in delivery warning period and there is no limit. Those playing front-month contracts on expectations of a lousy crop report were massacred.

Corn Daily Chart

Inflation Outlook

With crude prices falling and corn hammered, expect the next set of CPI figures to be tame.

Bear in mind I do not consider prices to be a valid measure of inflation. Oil rising because of peak oil has nothing to do with inflation. Nor does rising grain prices based on flooding. Nor does demand from China have anything to do with inflation in the US.

Thus, this plunge has nothing to do with inflation or deflation either.

Inflation and deflation are monetary phenomena. As far as inflation goes, these price movements are noise. However, for those who think price is what matters, prices are headed down.

Interest Rate Outlook

If oil and food prices continue to drop, ECB president Jean-Claude Trichet may change his tune on rate hikes. Of course Trichet will be out of the picture soon as his term expires in October.

In the US, the Bernanke Fed got another signal to keep rates excessively low.

Mike “Mish” Shedlock
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