Grain markets faltered all week as traders first positioned and then reacted to monthly USDA numbers. Outside of that event, there wasn’t a lot of news for the market to digest. Conditions for corn and soybeans remained unchanged and the lateness of the season means that the crop is more or less set aside from dry down. Early week talk also saw continued discussion of a possible frost, which probably provided a bit of buoyance but faded as the report approached and quite frankly, the threat to major production areas appeared minimal.
Cool temps this week probably did little to advance maturity of anything, but next week should show quite a bit of improvement in this area and both corn and soybeans should move more quickly to maturity. As for wheat, harvest remains slow but advancing and by Monday’s USDA’s report should show progress as a whole around 2/3 to ¾ complete. Admittedly that’s still very slow, but the market has more or less accepted this issue and while quality problems remain for many, the sheer yield of this year’s crop is pretty strong.
As we enter the very last weeks of the production season, we expect that prices of all three commodities will work lower with heavier pressure in soybeans but corn and wheat also working their way lower. The extent of these moves will be discussed below, as will the results/implications of the monthly reports.
For Brevity’s sake, we are going to focus on the production side this time. USDA did make adjustments to usage on the balance sheets, but the fact is the market isn’t paying attention to that right now and it’s had very little impact. If you have questions on any of the demand changes, please call.
Soybean prices took a heavy hit this week as USDA more or less confirmed ideas that both the U.S. and World will be swimming in soybeans. While we could see some modifications to acreage in next month’s USDA numbers, the sheer growth of carryout and the fact that crop conditions are the best in 30 years really minimizes the benefit we might see, even from losing 1-1.5 million acres (which we feel is a bit high, but the trade seems to be focused on). Below are the results of Thursday’s report:
|Actual||Average Estimate||Range of Guesses||August Numbers|
|U.S. Yield||46.6 bu/ac||46.3 bu/ac||45.4bu-48.8 bu||45.4 bu/ac|
|U.S. Production||3.913 bbu||3.883 bbu||3.760-4.035 bbu||3.816 bbu|
|U.S. Carryout||475 mbu||453 mbu||353-495 mbu||445 mbu|
|World Carryout||90.2 mmt||87.2 mmt||82.9-100.4 mmt||85.6 mmt|
There were a lot of things going on here but a few things to highlight:
- Yields for 2014 at current projections are 6% above trend line, which is within a “normal” variance for good crops. The change from August to Sept of 1.2 bu is one of the largest ever and indicates further revisions higher from this point forward. For crops harvested in the past 10 years, the normal variance above trend has been 4-8%. If we use the 8% number, the crop could grow another 62 mbu on the current acreage expectation.
- All states except two saw increases in yield projections. The two that didn’t were Kansas and South Carolina which had drops of around a bushel. Ten major states saw increases of 2 bu or more.
- The U.S. isn’t the only growth projected. World carryout is projected at 90.2 mmt. To put this in prospective, the carryout for the 2013/14 crop was somewhere around 67 mmt meaning the world is expecting almost 50% growth in carryout. Put another way, Brazil’s record crop last year totaled 86.7 mmt.
These issues speak for themselves, so we won’t hammer on them. The fact is that additional price pressure is pretty likely.
One item that has come up is carry, or lack thereof, in soybeans. Typically on such a large crop we would look for full carry changes from month to month. Instead, carry values are the narrowest we’ve seen since back in June when an overwhelming crop wasn’t the expectation. It’s an interesting issue, to be sure, but not one that is readily explained. One theory is that a lack of carry isn’t just an situation for very short crops, but one that occurs on extremes of either side. More likely, we would say the market is still making an adjustment from the short old crop situation and that carry will build once the new crop harvest actually starts coming in.
The report implications for corn are similar to soybeans, aside from the fact that the market seems much further into the process of digesting the carryout growth. Yield results were higher than expected, but carryout totals weren’t as much of a shock as usage was increased accordingly (lower prices = higher demand). The one factor that is relatively more friendly for corn is the fact that world carryout while still very high, did not exceed expectations and isn’t showing quite the same growth as it is on the soybean balance sheet.
|Actual||Average Estimate||Range of Guesses||August Numbers|
|U.S. Yield||171.7 bu/ac||170.4 bu/ac||168.5-174.1 bu/ac||167.4 bu/ac|
|U.S. Production||14.395 bbu||14.288 bbu||14.000-14.649 bbu||14.384 bbu|
|U.S. Carryout||2.002 bbu||2.012 bbu||1.811-2.421 bbu||1.808 bbu|
|World Carryout||189.9 mmt||190.3 mmt||184.6-202.6 mmt||187.8 mmt|
Highlights from the report:
- The 4.3 bu increase from the August report was the largest every from August to September, and as with soybeans, indicates further revisions higher in the future. The caveat to that is that the years with the largest revisions higher from September on saw little change from August to September, so changes going forward while continuing to move higher, are likely to be smaller.
- Acreage revisions are still viewed as a possibility by the trade with talk centering around a 1.5 to 2.0 million acre reduction. Keep in mind, though, that sixteen states saw revisions of 5 bu/ac or more and at that size change, acreage reductions won’t have the same impact
- Demand from USDA is unchanged from the 2013 crop, but growing from the August estimate for the 2014 crop. Given the growth of demand from 2012 to 2013, it’s possible we could see marginal growth again but the fact is the market can only absorb so much supply so fast and at this point, it looks unlikely that demand will keep pace with the record amount of bushels coming in.
As you can see, at least for corn the projected stocks to use ratio is closer to levels that are considered moderate. Still, that fact will likely only moderate losses, not prevent them. The growth is still quite evident on both a U.S. and global scale. Still while soybeans likely still have around $.80 or so of downside (perhaps more depending on SA crops), corn seems to be something closer to $0.30 to $0.40.
Of the three commodities, wheat saw the least revisions although they still had a notable impact on prices. For the month of September, USDA does not adjust production numbers at all and focuses primarily on global production as well as U.S. balance sheet changes. Production numbers will be addressed at the end of the month when USDA releases their annual Small Grain Summary. That report will break down final yields and acreage for all classes of wheat, giving a more complete picture of the situation.
For now, however, the market is focused on one thing: large global stocks. That didn’t change this month, and in fact, showed further growth with Ukrainian and EU production both revised higher. That news really shouldn’t be surprise to the market, but with that reinforcement, no reduction in production estimates, and falling corn and soybeans it was too much for the market.
U.S. balance sheet revisions were pretty minimal this month, but USDA did reduce expected export amounts by 25 mbu which pushed straight through to the carryout number. That’s not unexpected given the pace of exports so far and the fact that HRS bushels are looking like they are less than ideal for foreign demand. In fact, much of that demand is expected to shift to Canada, if for no other reason than their overwhelming crop from last year allows them more flexibility in meeting buyer demands. For that reason, even though production is the second lowest in eight years, we simply aren’t moving much of it and Stocks to Use ratio is projected somewhere in the low 30% range.
Globally, the situation continues to show heavy carryout growth. The 2013 carryout is 186.5 mmt and that is projected to grow to 196.4 mmt. Not unexpected, but still difficult. The quality of that crop is making things a struggle as well, since its forcing quite a bit more of the production into direction competition with corn rather than operating on a feed class and a milling class. In short, while prices may see more limited downside (like in corn) an out an out rally at this moment looks unlikely.
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