(Agrimoney) – If ever there is a time to expect volatility in commodity prices, it is one of the days, four a year, that the US unveils estimates for its grains stocks.
These inventory reports have a habit of producing surprises. And these in turn have a tendency to feed swings in grain and soybean prices.
The stocks report that the US Department of Agriculture produces on Monday has the extra kicker of being accompanied by revised estimates for sowings too.
That is not straightforward either, with persistent rains in the north west Corn Belt and the northern Plains provoking late doubts over planting estimates.
These are only being enhanced by a debate over whether the land will be counted as unplanted, or abandoned – meaning it was lost after seeding, and will be accounted for in a separate line of the balance sheet.
‘Provided the surprises’
Still, it is the stocks report which is being anticipated with most concern.
“Usually, it is the stocks report which is more important than the acreage numbers,” Rich Nelson, chief strategist at Allendale, told Agrimoney.com.
“It is historically the report which has provided the surprises.”
The level of uncertainty is evident in the extent of divergence in estimates, for instance, for corn stocks.
All commentators agree that stocks will be higher than a year before, following the bumper 2013 harvest.
But how much? Forecasts range from a little over 3.0bn bushels to nearly 4.0bn bushels.
And, given that stocks, as compared with demand, are a highly important pricing metric, the impact on futures of a high or low stocks figure can be significant.
Known unknowns
The difficulty in assessing the stocks figure is that, while last year’s harvest is known, and markets have a pretty good idea of some aspects of corn use, such as in making ethanol or for exports, for which there are weekly reports, one large demand area –in livestock feed – remains pretty opaque.
Some idea can be gained from livestock numbers, through for example the USDA reports on cattle on feed or broiler egg sets.
But only some idea.
Corn demand will vary, for instance, on the weights to which livestock are fattened, and the price relationship with alternative feed grains.
‘Feeding dynamics seem very weak’
Nonetheless, if history is a guide, it is those more negative on prices which will come out smiling today, with the corn inventory number beating expectations in five of the last seven years.
And there are plenty seeing such an outcome this time too.
Macquarie’s Chris Gadd, for instance, said that “lower feed demand is likely to cause stocks for corn to surprise above expectations.
“Underlying feeding dynamics seem very weak in the US.
“Feeding of corn in the US looks far from exciting as we are seeing no real major recovery in animal herd size,” he said, an observation which gained support from data late on Friday showing the US hog herd shrinking by 5.0% in the year to the start of June, above the 3.0% decline expected.
How much to start with?
Still, it is the soybean stocks figure which may arguably prove more important from a pricing perspective, given the paucity of US supplies – meaning that any difference from market expectations could have a large impact on what buyers are seen needing to pay to secure stocks.
“The focus is really 100% on soybean stocks,” Allendale’s Rich Nelson said.
There is a large gap in forecasts here too, with the top estimate, of 440m bushels, 32% above the lowest one, of 334m bushels.
And there is also an extra uncertainty.
Although the trade will have a pretty good handle on soybean exports and domestic crush from other data, there are many who believe that the estimate the USDA came out with for last year’s harvest was too small, meaning potentially larger-than-expected stocks as of June 1.
Import question
“If we get a figure of 375m, 380m, 385m bushels for soybean stocks, then that implies that last year’s crop was underestimated,” said Dan Cekander, director of grain research at broker Newedge USA.
“We would get a stocks number down close to 330m bushels if the crop number is accurate.”
As an extra uncertainty, US imports of soybeans are playing an unusually large role too, with volumes expected to hit a record high in 2013-14 as the US seeks to replenish its oversold domestic supplies.
But actual trade data appear, so far, to be showing disappointing imports.
“We are not set up in the US to take soybeans back up the Mississippi river,” said Jerry Gidel, chief feed grains analyst at Rice Dairy.
Break from history?
Still, history suggests that investors typically underestimate June 1 soybean stocks too, with the actual number exceeding forecasts in five of the last seven years
They are also, on plantings, usually too pessimistic on corn sowings too, underestimating the June number in five of the last seven years, if showing less of a trend in soybeans.
In fact, the corn acreage figure as of the end of June typically shows an increase over the initial forecast, made in March – a relationship which has held true for nine of the last 10 years, according to Chicago broker RJ O’Brien.
But here there is a definite idea around that today’s figure will show a break from history.
Although traders are indeed expecting today’s estimate to show a small increase, of some 34,000 acres, from the March figure of 91.691m acres, concerns over the extent of rains damage, and DuPont’s profit, have raised big questions over these forecasts.
“I definitely detect a sense that people are now expecting the corn area to come in low, but soybean planting area will come in high,” Newedge’s Dan Cekander said.
