Don’t Bank on the Trimming Trend to U.S. Soybean Carryout

(Reuters) – The soybean market has grown comfortable with the U.S. Department of Agriculture’s habit of drastically overestimating domestic carryout early in the marketing year.

But USDA might not have done that this time around.

Over the past three years, USDA has had to significantly scale back U.S. soybean ending stocks throughout the marketing year, especially in the second half. In 2015/16, the figure fell more than 60 percent from the initial estimate to the final.

The majority of the change to carryout in recent years stems from a large upward adjustment to exports, the United States’ leading demand source. This year, the No. 2 soybean supplier is projected to ship more than 2 billion bushels of the oilseed for the first time ever.

Thus far, traders are impressed with demand. Chicago soybean futures have been primarily supported by large weekly inspections and sales figures through the first four months of the season, and funds and other money managers opened 2017 with the longest Jan. 1 net position in futures and options in three years.

Following trends from the previous couple of seasons would suggest that USDA’s export figure for 2016/17 of 2.05 billion bushels should start to creep northward in the coming months, in turn driving down soybean carryout. But coming out of the gates this year, USDA may have made some of the necessary methodological adjustments to the main soybean demand items on its balance sheet to prevent blowing carryout to such a large degree again.

CONSERVATIVE CARRYOUT APPROACH

When USDA first releases its new crop supply and demand projections each May, the agency is still making tweaks to the old crop balance sheet, as that marketing year has not yet concluded.

Therefore, it helps to look at where USDA sets the new crop targets given its current assessment of old crop supply and demand – e.g. comparing the 2016/17 and 2015/16 carryouts in the May 2016 report. Using this comparison reveals that USDA went pretty conservative on the initial 2016/17 carryout target relative to previous years, which was 24 percent lower than the May 2016 estimate of 2015/16 soybean carryout. This is a sharp contrast to the previous three years, particularly 2013/14 and 2014/15, when the new crop carryout was initially projected at more than double where the old crop carryout stood.

This suggests that USDA may have set 2016/17 carryout at a more “reasonable” starting point than previous years. Still, when the initial 2016/17 U.S. soybean carryout estimate of 305 million bushels hit last May, many analysts and traders assumed this number would ultimately end up much lower.

Now carryout has climbed to 480 million bushels, and many believe there is still inherent risk of significant downside. And statistically, it is not a bad bet. In the last 20 years, USDA has underestimated initial soybean carryout only three times: 2004/05, 2005/06 and 2011/12. But looking deeper into some of the key elements of the soybean balance sheet implies that 2016/17 could stand apart from many of its predecessors.

BIG EXPORTS, BIG HARVEST

Monthly adjustments to exports have recently been one of the most influential drivers behind the U.S. soybean balance sheet with the world’s appetite for soybeans on the rise.

In May 2016, USDA placed the initial 2016/17 export target at a record-high 1.885 billion bushels. At the time, this number was larger than had ever been observed or previously forecasted.

Examining the May 2016 estimates of old and new crop soybean exports is particularly compelling, as the 2016/17 target was placed 8 percent higher than where 2015/16 exports stood.

Compared with a 1 percent drop and a 2 percent increase from the old to new crop figures in the one and two years prior, this suggests that USDA made a considerable upward correction to its baseline export projection this year.

Based on data from the last two decades, a year-on-year increase in export estimates similar to or larger than that of 2016/17 tends to occur only when the United States is coming off a production problem, something that has not been relevant in at least three years.

What is even more interesting is that USDA’s aggressive boost to 2016/17 soybean exports came despite the agency’s prediction of a 3 percent decline in production from 2015/16, further supporting the theory that USDA’s export estimate may be “different” this time.

And of course the 2016/17 soybean harvest did anything but decline, which is only going to make it more difficult for the United States to chew through the stocks.

The 2014/15 and 2015/16 harvests rose by 8 and 2 percent, respectively, from the initial estimate in May to the final number the following January.

But since the initial estimation of the 2016/17 harvest, production has risen a whopping 15 percent, and analysts expect the final figure to increase even further in Thursday’s crop production report.

This is going to make it even more difficult for 2016/17 to follow in the footsteps of the two previous years in terms of whittling soybean carryover throughout the year.

However, analysts still expect that USDA will modestly trim 2016/17 U.S. soybean ending stocks to 468 million bushels in Thursday’s supply and demand report, despite the anticipation of a larger harvest.

And U.S. soybean shippers do not appear to be giving USDA good reason to bump up exports on Thursday either, as the actual export pace relative to the annual target was the slowest in five years during the first three months of the marketing year.For now, final U.S. soybean carryout hinges most heavily on the South American soybean crop, particularly Brazil, the United States’ primary export rival. The trade is currently operating under the assumption that Brazil is on the brink of its largest harvest in history.

USDA’s next batch of reports is due out on Thursday at noon EST and will include updated figures for U.S. ending stocks, U.S. crop production, and South American production.