Column: USDA’s Corn, Soy Stocks Give Market Bulls The Upper Hand, For Now

(Reuters) – FORT COLLINS, Colo. – Chicago corn and soybean futures have had a tough time weathering the U.S. government’s agriculture reports in recent months due to overly bullish market expectations, despite the domestic harvests being poised to hit multi-year lows.

But nobody saw Monday’s stock surprise coming, as most market participants had come to terms with excessively large supplies. U.S. corn and soybean stocks as of Sept. 1 both came in below the trade range of pre-report guesses, setting up a potentially friendly scenario headed into the next round of reports.

The U.S. Department of Agriculture on Monday placed Sept. 1 corn stocks at 2.114 billion bushels and soybean stocks at 913 million, which are effectively the carryout levels for the 2018-19 marketing years. Analysts had expected 2.428 billion and 982 million bushels, respectively.

The corn result was particularly jarring, as it was the market’s largest miss in a quarterly stocks report since 2013. It also fell below last year’s 2.14 billion bushels, a level no one expected stocks to approach given poor demand stats in the fourth quarter.

Both supply levels are comfortable relative to previous years, especially for soybeans, but the lower starting points for 2019-20 combined with possible cuts to the harvest down the road give market bulls something to latch on to, at least until next week.

CORN

Corn futures rose 4% on Monday, hitting the highest levels since Aug. 12. Follow-through buying on Tuesday confirmed traders’ concerns about the tighter supply levels, as futures rose another 4.5 cents per bushel. Hedge funds were presumably net short around 170,000 corn futures and options contracts heading into Monday’s report.

The short bets are not illogical given current prices versus past ones, especially considering supply levels. On Tuesday, December futures finished at $3.92-1/2 per bushel, some 40 cents off the contract low set on Sept. 9. That is the highest price for the date in six years.

Monday’s numbers would imply the final 2018-19 U.S. corn stocks-to-use ratio around 14.6%, just a shade above the previous year’s 14.5%. Futures were 25 cents a bushel lower a year ago, even though stocks-to-use for 2018-19 was seen around 12% at the time.

Last month, USDA’s domestic corn balance sheet for 2019-20 suggested stocks-to-use at 15.5%, but that number is likely to change based on the recent supply discovery and potential changes to the crop.

USDA last pegged 2018-19 corn ending stocks at 2.445 billion bushels, so plugging in the new number and changing nothing else would yield a 2019-20 carryout well below 2 billion bushels. This is a psychological benchmark for the market, as supplies above that level are approaching burdensome.

USDA’s next assessment of the U.S. crops will come on Oct. 10, and in the past, the October report has included area adjustments based on the latest acreage registration data. Many analysts think USDA is currently overstating corn acreage, which if true could reduce output without a change to yield.

Many also think yield is overblown at 168.2 bushels per acre. However, commodity brokerage INTL FCStone on Tuesday raised its survey-based estimate to 169.3 bpa from 168.4 a month earlier.

Only 11% of corn was harvested as of Sunday, so yield reports are not abundant, and they will continue to trickle in slowly. The crop was only 43% mature on Sunday, tied with 2009 for the slowest on record and well behind the five-year average of 73%.

The trade’s miss on soybean stocks was big in terms of bushels but not by percent due to the enormous number. The market missed Sept. 1 soybean stocks in the previous two years by larger percentages.

November soybeans settled at $9.19-1/2 on Tuesday, slightly more than a dollar above the May 13 low and about 62 cents higher than a year ago. The two-day rise of 4% is the largest for a two-day stretch since May.

Replacing USDA’s current 2019-20 beginning stocks with 913 million bushels drops carryout to 548 million bushels, if nothing else were changed. That is a number analysts did not see happening anytime soon, and this is before any potential cuts to production, which many believe are coming.

USDA’s long-term forecast published late last year suggested that under a business-as-usual scenario, soybean stocks would return to that level about two years from now, and the initial assumptions were even lighter at that time than they proved to be.

USDA lopped 116 million bushels off the 2018 U.S. soybean crop on Monday, the largest change to a previous harvest in at least 20 years, perhaps ever. USDA frequently adjusts the previous soybean harvest on Sept. 1 based on new stocks and usage information.

A cut that large seemingly should have warranted lower supply, but USDA last month had the 2018-19 residual usage term at 75 million bushels. That would be a 12-year high, so there was plenty of room for adjustment.

Recent developments in the ongoing U.S.-China trade negotiations and in China’s livestock industry may be starting to signal a light at the end of the tunnel for demand, which has been dismal.

News broke on Monday that China bought at least 600,000 tonnes of U.S. soybeans and may buy up to 2 million total this week ahead of next week’s trade negotiations, but USDA failed to confirm any of those purchases on Tuesday morning.

Aside from the ongoing trade war, China’s demand for U.S. soybeans has been slow due to African swine fever, but some analysts believe the situation could normalize as early as a year from now. The country’s agriculture ministry said last week that pig production capacity is finally starting to recover.

The U.S. soybean crop is the shorter-term focus, though, and the recent futures rally could be justified further if lower output is realized on Oct. 10. Hedge funds have basically been short soybeans for more than a year now, but they could end up disappointed pending next Thursday’s data.