Investors brace for Wasde crop report ‘swing ball’

(Agrimoney) – Will making sowing decision in the US next spring be as simple as ABC?

“‘Anything but corn’,” said Jerry Gidel, chief feed grains analyst at Chicago broker Rice Dairy.

“That’s what North Dakota growers are saying when asked what they will be planting.”

And little surprise when farmgate corn prices for the state, situated a distance from US ports and so from export demand, have fallen well below $3 a bushel, and reportedly even beneath $2 a bushel in some places.

‘Good feel’

The chance of a revival in that price, and the potential for encouraging more corn acres next year, may depend to a large extent on what the US Department of Agriculture reveals later today in its monthly Wasde crop report.

The briefings are anyway high points of the grain investor’s calendar.

But this one is particularly important.

At broker Allendale, Rich Nelson, chief strategist, said: “With the October report, the USDA gives a good feel of what final numbers will be” for crop production, with an increased stress on actual findings, rather than the data based on the likes of weather models and satellite pictures which predominate in reports earlier in the growing season.

Yield ideas

Still, if only yield were the only factor that investors had to concentrate on.

There is little dispute that the USDA will in the Wasde lift its forecasts for corn, and soybean, yields.

In fact, following a plethora of upbeat yield reports, none of the major brokers sees anything but upgrades on both scores.

That said, there is some dispute over the extent to which the figures will be increased, depending in part how much stress brokers attach to talk of yields which, for corn especially, have stretched well above historic norms – if the reports can be believed.

‘Not so easy’

One factor worrying some observers is that yields might fall-off as the harvest spreads into western and northern Midwest areas where conditions were not as ideal over the summer as further south, bringing a little too much in terms of coolness and moisture.

“It is not so easy as just judging it on the big yields in the South and the Mississippi Delta, and to a large part in the eastern Corn Belt too,” said Don Roose, president at US Commodities, the Iowa-based broker.

“In the western Corn Belt,” including Iowa, “yields are more up and down.”

Rice Dairy’s Jerry Gidel said: “Results from the likes of Wisconsin and Michigan don’t seem to have been as great, especially for soybeans.

“We are still in for huge crops, but maybe not as big as some people are expecting.”

‘Swing ball’

Besides, there is another big uncertainty too, over crop areas, over which there is more disagreement.

While some believe the USDA has underestimated area, on a harvested basis, by up to 1m acres for corn and 40,000 acres for soybeans, others believe current figures are significantly exaggerated, with a wet spring having caused more setbacks than thought.

Some brokers believe the corn area will end up 2m acres or more below the USDA’s current estimate of 83.8m acres, and for soybeans 1.6m acres below the current guess of 84.1m acres.

The acreage estimate could represent something of a “swing ball” for investors, Mr Roose said.

Acreage vs yield

“If you take the corn acreage number down 2m acres, that is equivalent to about 4.3 bushels per acre on yield,” he told Agrimoney.com.

“So if the figure does come in 2m acres down, that means to the yield has to go up more than 4 bushels per acre just to keep production the same.”

If you might think that an argument over an area of 2m acres, equivalent to about 8,000 square kilometres, would be easy to settle, well it isn’t, thanks in part to uncertainty over a separate set of acreage data, from the Farm Service Agency, drawn from farmers’ own filings.

This indicates big shortfalls in acres below USDA numbers. But whether that is down, as many investors believe, to bureaucratic delays within the agency, and delays in farmers filing, rather than an actual void in area, Agrimoney.com has reported on this argument before.

Demand too

Then there is consumption to take into account, before getting to the end-stocks number which tends to have the biggest impact on prices, in indicating the extend of supplies, and so the level of competition among buyers to secure them.

“Yield is not the only thing we are looking out for on this report,” Allendale’s Rich Nelson told Agrimoney.com.

“When the USDA increases production, it tends to increase its consumption estimates by at least a portion of that,” with raised supplies inferring lower prices and so enhanced demand.

Feed needs

For corn, lower prices tend to support profits for ethanol producers, for instance, and demand from this sector, although with a recent pullback in prices of the biofuel itself, some of the fizz has gone out of the industry.

“We probably won’t see an increase in the ethanol production estimate” for 2014-15, Mr Nelson said.

“In fact, production is running a little behind the USDA estimate for the full season.”

However, there is potential for an increase in demand from the livestock industry which, even if requiring time to increase animal numbers, can boost production by feeding for longer.

“You can probably alter feed use by 5-10% per animal just be alternating the time taken to finish it,” he said.

Wide range of forecasts

It is such thinking – combined with a historically low carry-in stocks figure as unveiled by data last week – that has led to ideas of the USDA actually lowering a little its estimate for domestic soybean inventories at the close of 2014-15, despite the prospect of an increased yield.

Analysts on average expect the soybean stocks estimate to be trimmed by 3m bushels to 472m bushels.

However, the extent of movement in the parts needed to reach this estimate is highlighted in the gap between the most generous forecast, of 550m bushels, and the lowest, of 376m bushels – more than 30% lower.

For corn, the gap between the higher stocks estimate, of 2.52bn bushels, and lowest of 1.79bn bushels is similarly large.

And such uncertainty comes before getting to estimates for the likes of Australian wheat production, Brazilian soybean output and European Union corn imports which are also seen as likely origins for potential Wasde surprises.

Preparing for the Wasde has certainly not been as easy for investors as ABC (as evident in the apparent wave of short-covering in the run up to it) even if the outcome could make decisions a lot easier for North Dakota growers.