Grain investors could be in for Wasde surprise

September 11th, 2014

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Category: Grains

(Agrimoney) – Grain investors may be in for a surprise later on Thursday.

But would it matter?

It may well be that the US Department of Agriculture, in its benchmark Wasde crop report, comes in with estimates for the US corn and soybean harvests – proving the focus of the briefing – lower than the market has expected.

The trouble is that should the Wasde come in with a crop which is merely huge rather than gargantuan, that may not provide enough of a shock to reverse gloom on grain prices.

Big hopes

Expectations for US production have certainly grown, as summer has moved into autumn without any apparently significant weather threat for corn and soybean crops, with even the cold snap moving in now, expected to cause limited frost damage, providing a weather rally which lasted only one session.

At Chicago broker RJ O’Brien, Richard Feltes flagged “more talk” of the US corn yield hitting 175 bushels per acre, or more, and the soybean yield topping 48 bushels per acre.

These ideas, supported by strong results from the early harvest in the US south, especially of soybeans, compare with current USDA forecast of 167.4 bushels per acre for corn and 45.4 bushels per acre for the oilseed.

And they compare with expectations of analysts that today’s Wasde will come up with a figure of 170.7 bushels per acre for the corn yield, and 46.3 bushels per acre for corn.

History lesson

But history suggests that September Wasdes may not be the arena for such large yield upgrades, even in years with good-looking crops.

“People keep comparing this year to the past years with record crops,” said Jerry Gidel, chief feed grains analyst at Chicago-based Rice Dairy.

“Even in the good years, the change from August to September is not that big in terms of yield.”

Five years ago, when the USDA raised its corn yield estimate in September by 2.4 bushels per acre, was unusual – and even then “less than the rise the market is expecting now”, of 3.3 bushels per acre.

In 2004 – a year of record US corn production which has been much compared with 2014 – the upgrade in the September Wasde was only 0.5 bushels per acre.

In 2003, also a record year, the yield estimate took a downgrade, of 0.6 bushels per acre, with 2000, which saw the previous yield record, seeing a small drop in the forecast in September too.

‘Potential for a surprise’

For soybeans, September Wasdes can prove a bit of a minefield too.

“In 2004, which everyone always remembers as such a good season, the yield estimate was actually cut in the September Wasde,” by 0.6 bushels per acre to 38.5 bushels per acre, Terry Reilly, at Futures International told Agrimoney.com.

“It then went back up again in the October report,” in fact to 42.0 bushels per acre

“There is the potential for a surprise, that would make me want to come into this report flat”, in terms of investment positioning.

Even in the record year of 2009, the September Wasde upgrade was a modest 0.6 bushels per acre –below the 0.9 bushels per acre that investors are expecting now.

Methodology factor

And there are some methodological reasons to expect the yield forecasts to fall short of expectations too, with the delayed development of this year’s crops potentially hampering efforts by USDA scouts to get a good grip on the crop.

Increasingly, as crops develop, USDA analysis relies on actual crop observations, rather than the figures suggested earlier in the season by the likes of weather models.

“There is a risk that given the slow build of growing degree days in the northern parts of the Corn Belt and up into the Plains that the USDA won’t be able to use their objective yield data in these regions,” said Chris Gadd at Macquarie.

“If this has happened, it may cause the USDA to report a more conservative yield estimate than many expect.”

‘Gradual steps’

And a lower-than-expected yield estimate would typically suggest a bounce in prices.

But will it this time?

“We might see a one or two day rally,” said Rich Nelson, chief strategist at Chicago broker Allendale.

“But I think the trade as a whole believes the yield could go very much higher” as the season unfolds, with Allendale itself forecasting a final corn figure of 174.1 bushels per acre.

“Everyone knows the USDA only takes gradual steps, usually, in raising crops forecasts in the record crop years.”

Acreage factor

Are there any other factors, beyond US yields, which could give prices a longer-lasting rally?

At Benson Quinn Commodities, Kim Rugel said that sowings estimate “remain a wild card”.

While not usually adjusted in the September Wasde, insurance data from the Farm Service Agency “suggest prevent plant acres over 800,000” for soybeans.

“There is a nominal risk a lower harvested acreage number could result in lower-than-expected production estimate,” she said.

Supportive for prices

And outside the US, there are some potentially bullish factors too.

Estimates for Chinese soybean imports could be in for an upgrade, with Futures International’s Terry Reilly seeing potential for a 1m-tonne lift, to 70m tonnes, in the estimate for 2013-14, given the strong import pace suggested by official data.

Richard Feltes at RJ O’Brien believes that the estimate for 2014-15 could be lifted by 2m tonnes to 75m tonnes given record Chinese advance purchases of US soybeans for the season, plus “expectations for a rebound in Chinese hog and poultry production, the lowest soy prices in four years and a decline in Chinese soy production”.

‘Lean negative’

Still, investors do not have to look too far either to find further reasons for price gloom, with many investors, for instance, seeing estimate for European Union corn imports as too high, given the huge amounts of feed wheat thrown off by the latest harvest.

The United Nations’ upgrade on Thursday to its estimate for world coarse grains and wheat output has underlined expectations for strong world cereals supplies, with Russia’s wheat crop viewed by many as especially ripe for an upgrade.

And, for soybeans, while the USDA current foresees a rise of only 3.5m tonnes in Argentine and Brazilian soybean output in 2014-15, “we think it could be over double that gain given chorus of South American experts touting a sizeable shift from corn to soybeans”, Mr Feltes said.

Factors domestic and international “lean negative” on pricing prospects, he said.

“It is hard to imagine a bullish report.”

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