(Agrimoney) – Tuesday is a big deal for grain markets – potentially a very big deal – although not for the reasons that many investors imagine.
Most of the talk in the run-up to a day which will bring two key US Department of Agriculture reports – on domestic grain stocks as of the start of the month, and on farmers’ prospective spring sowings intentions – has been on the plantings data.
And it is not difficult to see the importance in these statistics.
For corn, for instance, the gap between analysts’ highest and lowest acreage forecasts, at 2.7m acres, is equivalent in production terms to roughly 400m bushels in production terms, potentially the difference between snug and ample inventories, and the impact on prices that entails.
Sowings vs stocks
On the inventory data, the margin for error is, on paper, not quite so large, with the highest and lowest analyst estimates some 340m bushels apart.
Yet ask brokers, and it is this report that they feel the most important, in terms of likely taking the lead in markets afterwards.
“We look at the grain stocks report has having more importance,” said Rich Nelson, chief strategist at Chicago broker Allendale.
At Iowa-based US Commodities, Don Roose told Agrimoney.com: “The market will be looking at corn and soybean stocks.
“Area is still subject to change, and yield is still something that’s up in the air.
“But stocks data are about what there actually is available,” and which stands to have an impact on the 2014-15 crop balance sheets still taking priority in pricing terms.
‘What really directs prices’
This may be why the stocks data have, according to research by Chicago’s AgResource, historically taken the lead in setting prices after the reports are released.
“Sure, if corn sowings came in at 94m acres,” well above the consensus of 88.7m acres, “that is going to drive December corn futures,” said Bill Tierney, chief economist at AgResource, and former USDA principal grains economist.
“But data suggest that what really directs price movements is the stocks report.
“The market tends to move in line with what the stocks data would dictate, rather than the area report.”
And it is not just any stocks data at that which is important, with the corn figure the dominant force.
“What has have seen is that price behaviour the week after a report is mostly a function of corn stocks.
Even for soybeans, the market seems to reflect what happens in corn.”
‘Potential for the market to pop’
The price movements can be “large” too. In fact, they may be getting larger.
While the average for the past 30 years is, for corn, for futures to move 2.6% higher or lower in the week after USDA stocks-spring planting data days, in the past five years, the swings have been far larger.
The biggest response downward was seen in 2011, when Chicago futures tumbled 12% in the week after a report, while the 2013 data provoked a 15% rally.
This year, futures may be primed for an unusually large response to unexpected data, given the extent of bearish positioning by funds in the run-up to the reports.
“I am a little bit concerned given the large short position we have, for this time of year,” Mr Tierney told Agrimoney.com.
“This gives the potential for the market to pop,” if stocks data come in short of expectations and provoke a mass of short-covering.
‘Large black hole’
As to what might cause a surprise, there is always the “large black hole” that is the feed and residual category for corn, and on which the stocks data given an indication, Allendale’s Rich Nelson said.
While use of corn in making biofuel can be estimated from weekly US ethanol production numbers, and export data are closely monitored, the quarterly grain stocks reports offer the best insight into what is going on in feed use of the grain, the third main demand category.
“We have got the US hog herd growing at 7%,” as confirmed by official data on Friday evening, “we have expansion in chicken production – we believe the stocks data will imply bigger feed and residual use”.
Indeed, Allendale foresees corn stocks as of March 1 coming in at 7.50bn bushels, more than 100m bushels below the consensus estimate, as enhanced use saps inventories.
Cattle factor
This would imply that US corn supplies “might be neutral” in pricing terms, and “maybe even tighter than that”, Mr Nelson said, foreseeing some scope, if Allendale’s forecasts for the stocks report are right, for the USDA to cut its estimate for inventories at the close of 2015-16.
Not that US Commodities’ Don Roose concurs, noting that “cattle consume the most corn” out of the three main protein sectors.
And US cattle numbers, including on feedlots, have been in decline.
Besides, corn isn’t the only feed grain, and a decline spread between corn and wheat prices over the quarter may have encouraged use of the latter.
Costs, not prices
The two brokers have differing expectations for corn acres too, with US Commodities more generous, seeing area at 89.5m acres, some 800,000 acres above consensus, while Allendale has the figure a little below the average, at 88.5m acres.
Sure, the price ratio between November soybean and December corn futures has declined to some 2.27, from 2.39 at the start of this month, boosting the appeal of the grain as an option, in terms of relative revenue prospects.
However, that is not the only factor.
“If we look at the market from a pricing perspective, we might not except to see any major changes in acreage,” Mr Nelson said.
“But the issue is not prices, but costs being paid up front by farmers having to get used to selling old crop at a loss.
“It costs about $200 per acre more to plant corn.”
Total area
And of course the story is not just about corn vs soybeans, but about the total acreage available to be sown, and the appeal of other crops too.
“You have to consider how many of the acres taken out of conservation programmes, but with limited yield prospects, will be planted in a year with lower prices,” said Jerry Gidel, chief feed grains analyst at Rice Dairy.
On crop choice, Mr Gidel himself is more of a fan of sorghum, for which he sees sowings hitting 8.2m acres, boosted by its relatively high price this season, spurred by unusually strong Chinese import demand.
Still, when it comes to the release of the report on Tuesday, it looks like traders’ first glance, before getting down to 2015 planting considerations, will be to the stocks data.
And to the corn inventory figure in particular.
