Will big data day sent grain prices soaring again?

January 9th, 2015

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Category: Grains

Young man in wheat field 450x299(Agrimoney) – It is little wonder that agricultural commodity investors are getting nervous about Monday.

It will bring round again the slew of crop reports which last year, converted a grain price rout into a rally, catching a swathe of funds off guard and, ultimately, encouraging the hefty sowings which have been reflected in bumper world harvests.

“Last year, these reports are what changed the downtrend in the market to an uptrend,” Rich Nelson, chief strategist at Allendale, said.

And one worry is that history will repeat itself.

‘A big report’

The US Department of Agriculture’s big January report days are anyway causes for caution, having a record of bringing large price moves.

“There average in modern times for soybeans is a move of $0.34 a bushel, up or down, and of $0.25 a bushel for corn,” Don Roose, president of broker US Commodities, told Agrimoney.com.

“We are talking of a big report.

“It sets in stone, bar weather in South America, what the market will be trading really until the end of March,” when US spring sowings estimates appear.

‘Limited support for prices’

In fact, there are three main reports.

One is on US winter wheat plantings, seen as the least important briefing, least likely to cause a stir, although it has to be said that there remain a wide range of estimates, of 41.0m-44.0m acres – meaning the investors are not even agreed on whether sowings were higher or lower than last year’s 42.4m acres.

Christopher Narayanan, for his part, sees the consensus estimate this time of 42.6m acres as being too high, based on ideas that cost of production, compared with market prices, depressed seedings of both hard and soft red winter wheat, the main types.

“We see some limited support [for prices]” on that score, he said.

‘Record low feeding’

That said, Mr Narayanan was less optimistic on how wheat will emerge from the second report, on US grain stocks as of December 1, giving a quarterly insight into the rate of usage of supplies.

For wheat, most investors see US wheat inventories as of the start of the December (half way through the 2014-15 marketing year for the grain, on the US calendar) as proving higher than last year, despite a 100-bushel smaller harvest.

Consumption is seen falling even further, dogged by the impact of relatively high US prices in slowing exports – down 31% at 13.89m tonnes so far this season, as measured by cargo inspections – and use in livestock feed too.

“We see wheat feeding coming in record low for the three months to December 1,” Mr Roose said, citing the relatively high prices of the grain during the period compared with corn values, which remained under pressure from a record US harvest for much of the period.

‘Chance of a surprise’

In fact, it is for corn that the quarterly stocks report is seen as potentially provoking a surprise, as it did last year, when inventories came in well short of forecasts, on a rise attributed to higher-than- expected use of the grain in livestock rations.

(Other major corn consumption types, such as for export or making ethanol, are measured by separate weekly data.)

“We have some expansion going on in US livestock herds. We are fattening to higher weights. We have more chickens being fed,” Allendale’s Rich Nelson told Agrimoney.com.

“There is certainly a chance of a surprise.”

Range of forecasts

Furthermore, could the weakness in oil prices provoke ideas of an end to a period of strong ethanol production in the US, where biofuel plants use corn as the chief raw material?

While the market consensus is of a December 1 US corn stocks figure of 11.12bn bushels, the lack of confidence in it is evident in a range of forecasts of more than 500m bushels, a figure termed “sizeable” by Richard Feltes at broker RJ O’Brien.

And the breadth in estimates for soybean stocks was even bigger, in percentage terms, spread over 300m bushels, around a consensus of 2.59bn bushels.

Is there a chance of a surprise here too?

“Note that December 1 soybean stocks are typically within 60m bushels of the average trade guess,” Mr Feltes said.

‘Bit more uncertainty’

The outcome of the stocks estimates help provide the backdrop against which the third heavyweight report is drawn up – the January edition of the USDA’s Wasde crop report, which in a normal month is a big event, but no more so than this time.

The January edition, besides potentially seeing changes to the demand side of the balance sheet, produces the final estimates for US corn and soybean production last year.

And that itself may not be the formality it can prove in some years, when harvests have been pretty well assessed by November, when the previous estimate is made.

“There is a bit more uncertainty about the reports this time, both the stocks report, and what we are going to see in the Wasde,” Mr Nelson said.

‘Not gone away’

Indeed, while the consensus forecasts see little change to the corn and soybean production numbers, there remains the wild card of whether the USDA has, to a large degree, overestimated acreage, as suggested by data collated from farmer filings.

“Nobody seems to be taking about the ideas about acreage cuts, but the potential has not gone away,” said Jerry Gidel, chief feed grains analyst at Rice Dairy.

“People seem to stick with the idea that ‘big crops get bigger’,” the adage that estimates for large crops grow as the season progresses.

“There just seems to be this resistance to reducing anything that would make a big negative change to the final production number,” Mr Gidel said.

Price prospects

Even so, Mr Gidel highlighted one reason why any bounce in prices on Monday, assuming bullish data, may not be as large as last year.

“This year we have already had a bounce going into the report. Last year, we did not have a bounce before.”

Indeed, hedge funds were, at year ago, betting large on further drops in prices, holding sizeable net short positions in both corn and wheat – unlike this time, when they are net long in both.

“Last year, in a rather short time frame hedge funds went from a massive net short corn position to a net long position, and were the dominant group moving the market,” another US broker said.

“This year their powder is not so dry however,” meaning the many investors hoping for a 2014-styles price recovery “may prove disappointed”.

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