Last Friday’s crop report was a shocker.

The US Dept of Agriculture estimated planted corn acres for this coming crop year at only 78 million, 2.5 million acres below the historical average yearly estimate. The announcement was the largest downside surprise ever.

Where did these acres go? Soybean acres were up 2.9 million. Apparently the US farmer is looking for a lower-cost alternative (soybeans are cheaper to plant because they don’t require expensive nitrogen fertilizer).

As you can see on the chart below, December (new crop) corn gapped higher Friday to close up 3 percent at a new contract high of 268. I’ve indicated the gap--from 260 1/4, the Thursday high, to 267, Friday’s low--on the chart.

December 2006 Corn

Commodity.com

In the March 6, 2006, Commodities Trends, "The Next Gold Will Be Yellow", I discussed my reasons for the coming bull market explosion in corn. And the case is compelling even without this news.

The acreage reduction only makes the story more bullish because, in effect, it takes 450 million bushels of expected production out of the picture. Assuming good weather, the carryover stocks will drop to just more than 1 billion bushels. If weather, certainly an unknown at this point, turns unfavorable it wouldn’t take much of a yield reduction to wipe out the supply cushion. It would take higher prices (perhaps much higher) to ration demand, which is somewhat inelastic with corn usage for ethanol exploding.

The longer-term chart below is reproduced from the previous article. As you can clearly see, corn is still historically cheap.

Corn Prices 1993-Present

Commodity.com

In the March 6 article I outlined a couple of option strategies that are already working. But what if you’re not in this market yet? Should you jump in now?

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