Surprises in the USDA Report Shake up the Markets

(Farm Futures) – The USDA has a habit of packing a surprise or two into each month’s supply and demand report to shake up the trade a little. Just when the markets seem to make sense, one of these interesting items pops up and humbles market analysts and traders.

There were two such surprises in the March report. First, no change in the soybean numbers caught everyone by off guard with the market looking for an increased export number based on continuing large shipments well past the time where they should turn lower. Second, the corn demand for feed increased by 100 million bushels giving the market a bit of a shock 20 days before the quarterly stocks report comes out.

The increase in soybean exports had been traded into the market as prices moved above $15 prior to the report with prices expected to move even higher. The discussion seemed to be whether USDA would lower ending stocks or increase imports to meet the gain in exports, but there was little doubt that exports were moving higher. Tied to this disappointing news, the USDA went ahead and piled on a couple of other pieces of information to dishearten the market. World ending supplies were increased to 60.21 million metric tons, a little over 0.50 MMT more than the average trade guess. South American production was expected to be lower based on weather issues in both Brazil and Argentina, but only 1.5 MMT was reduced from the Argentine production and Brazil was left alone.

Corn traders had expected a reduction in exports along with a possible reduction in ethanol use and a larger carryout number. The reduced export number came in with a decrease of 75 million bushels, but no change in ethanol or ending stocks was to be seen. Instead, the feed use number was increased by 100 million bushels and imports were higher by 25 million bushels. All expectations were for feed use to be steady until the quarterly stocks report on March 28, and ending stocks to move higher with the export reduction. With all the good news in the domestic market, there was little concern with a smaller than expected reduction in the South American crop.

When compared to corn and soybeans, the adjustments in the wheat balance sheet were just as expected and brought little excitement. Wheat carryout was increased by 25 million bushels with exports falling by the same amount as the market was expecting. The one surprise in the wheat numbers came in the world ending stocks where an increase of 1.59 MMT was well above the average trade guess that there would be no change.

The end of March will bring another opportunity to evaluate USDA numbers when the March 1^st quarterly stocks and the 2013 planting intentions reports are released.

Corn prices remained above $7 with March futures were in delivery and coming close to the end of the contract. The tight supplies brought little delivery through the week as farmers are not willing to move much inventory at the present time with many expecting the price to move even higher through the summer.

Basis is taking another quantum leap stronger as buyers roll bids to May, thanks to a hefty inverse with March. End users continue to bull spread the market, buying nearbys and selling deferreds, as a way of covering their basis risk until they finally secure grain they need.

Demand was not thought to be exceptionally strong with exports disappointing through the year as prices turned buyers to other suppliers. The big feed use increase in the USDA report will change some of the perception of demand moving forward and could see further strength in both price and basis as spring turns to summer. Ethanol production seems to be the unknown as plants have been considering shifting to wheat and sorghum as a feedstock over the past few weeks with the premium for corn makes it worth considering. There may not be a reduction in ethanol production, but the amount of corn could well be lowered.

Opportunities to sell old crop corn at better than $7 could remain with us through the end of March supplies remain tight. New crop pricing at profitable levels is still in place for those who are interested in selling uninsured bushels.

Soybean prices continued higher this week with March futures trading above $15 toward the end of the week with the outlook for U.S. supplies growing tighter and tighter. Current patterns suggest ending stocks could fall below 100 million bushels by the end of the marketing year on Aug. 31, without either significant rationing from higher prices or imports.

USDA refused to change anything in its estimates as they wait to see how long these high export levels carry into March. With China moving purchases back to the U.S. due to difficulties shipping supplies out of Brazil, where normally chaotic logistics were overburdened by labor problems and a record crop flowing out of the field. An agreement by dock workers not to go on strike again before March 15 is coming near to its end, so further disruption is not unexpected.

USDA doesn’t estimate Chinese imports from the U.S., but current patterns suggest China has already bought 96% of the total implied by the government’s projections. Obviously, something’s got to give.

The market has closed above $15 for the past two days, giving the market support to move into the rest of March as exports continue to move at high levels. The big concern at this point is how long it might take to move the large crop out of South America, leaving export buyers in Brazil well into the fall when U.S. beans are expected to fill the pipeline. Holding onto the last 2012 soybeans too long might turn into a mess if a large crop is planted here and needs a home when late shipments are coming from South America. U.S. Rallies in new crop are still likely due to tight old crop stocks, but our current sales target range for November futures is not unlimited at $12.80 to $14.15 with normal weather.

Wheat prices have continued to drop to levels that have ethanol plants interested in mixing soft red winter wheat into their feedstock to lower the cost of high priced corn. Feed mills have been buying wheat for a few weeks, but this is the first news of ethanol plants buying wheat. Prices continue to slide and export numbers are moving higher over the past few weeks, but not enough to keep USDA from lowering export number in the March report.

Even with the higher export shipments, prices have found little traction to move higher with a continued series of winter storms moving across the Plains to improve prospects for better winter wheat yields. The crop remains in mostly poor condition and a few weeks of warm dry weather could offset the gains made from the recent addition of moisture.

Supplies from competitors are also missing right now. Australia has less to sell, and little will move out of Argentina this year due to lower acreage and politics. Ukraine and Russia are sold out, and there are indications Russia will turn to imports to keep domestic prices low until its new crop is harvested. Ukraine’s 2013 crop appears in good shape so far, but questions remain in Russia, where the government may also buy new crop supplies to rebuild reserves, further limiting exportable supplies. Production in France and England could also be down.

Crop insurance provides a backstop for growers of both winter and spring wheat to wait for rallies as the winter wheat crop emerges from dormancy. Fields are still in tough shape in many areas, which could generate rallies, but getting K.C. and Chicago July futures anywhere near their RP base prices will be difficult.