Will Brazil dryness, US crush doubts give the Wasde bite?

February 10th, 2015

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Category: Grains, Oilseeds

soybean field & blue sky 450x299(Agrimoney) – As reports go in the Wasde series, the monthly US briefings which represent a highpoint of the agricultural commodities calendar, the February edition is not usually much of a market mover.

“We see prices potentially moving $0.05-0.10 per bushel as a basis of this report,” said Rich Nelson at Allendale, the Chicago broker.

“It is not usually a game changer,” said Don Roose, president of Iowa-based broker US Commodities.

Seed needs

And you can tell as much when much of the debate ahead of the report, released by the US Department of Agriculture at 11.00 Chicago time (17:00 UK time), centres on small estimate changes – fine tuning of the balance sheet, rather than big picture stuff.

At Chicago-based Rice Dairy, chief feed grains analyst Jerry Gidel flags the potential for bigger US seed use of soybeans, for instance, this season than the 92m bushels that the USDA has factored in, given the prospect of larger plantings coming up.

“The probability that US soybean sowings are going to go lower than last year is about zero,” Mr Gidel told Agrimoney.com.

“You should at least see seed use going to 97m bushels,” consumption ahead in 2013-14, ahead of last year’s soybean sowing splurge, “and maybe higher”.

Ethanol question

Traders are somewhat on hold for the USDA’s annual outlook forum at the end of next week, which will give the first formal estimates for domestic balance sheets in 2015-16, and some snippets on world prospects too.

Still, there is the potential for some surprise in today’s Wasde, for example in corn over the pace of US consumption of the grain for making ethanol.

Morgan Stanley flagged the likelihood of an increase of 25m bushels to 5.20bn bushels in US use of the grain for making ethanol in 2014-15 – and foresaw further upgrades on the way, to take the figure to 5.245bn bushel at the end the season.

“The USDA will likely raise their ethanol use estimate,” the bank said

However, other analysts said that a sharp drop in ethanol output shown up in data last week – revealing a drop in weekly volumes to 948,000 barrels a day, the lowest since November – may well have put a dampener on any chances of an upgrade.

Crush debate

On US soybean usage, there is some debate too, with Don Roose, for instance, saying that the domestic crush “has been pretty strong”, with December’s number, for instance, the second largest on record, at 165.383m bushels, according to industry data.

November’s crush, at 161.211m bushels, was the fourth biggest ever, and the highest for the month on record.

Nonetheless, after a weak start to 2014-15, a reflection of a late harvest and thin stocks left over from last season, Morgan Stanley said that the crush “remains weaker than expected, down 1.1% in the marketing year to date” – rather than showing the 2.7% rise that the USDA has factored in for the whole season.

At Allendale, Rich Nelson said that the broker was expecting a 10m-bushel downgrade in the Wasde to the USDA forecast for the US soybean crush this season.

Brazil dryness

Questions on bigger numbers surround production in South America, which has come particularly into focus since the start of harvest in earnest in Brazil, where dry weather has curtailed harvest expectations – if without question from brokers that a record crop is on the cards.

Only on Monday, FC Stone lowered its estimate for the Brazilian harvest by 700,000 tonnes to 92.8m tonnes, while AgRural slashed its forecast by 3.1m tonnes to 91.9m tonnes.

Oil World has pencilled in a harvest potentially as low as 89m tonnes.

“With dry weather beginning to temper local production estimates, we would not be surprised if USDA lowered Brazilian production from the current 95.5m-tonne estimate,” Morgan Stanley analyst Bennett Meier said.

‘Drought persists’

That said, “we still have the change for a 94m+ tonne crop”, US Commodities’ Don Roose said.

Weather reports from Brazil, which after all has a huge growing area, have appeared somewhat at odds – or at least shown differing interpretations.

While many commentators, for example, have focused on rains in much of central Brazil at the weekend as positive for crop production, Gail Martell at Martell Crop Projections said that “drought persists in Mato Grosso”, Brazil’s top growing state, despite the precipitation.

“The key centre west area has received only 59% of normal rainfall the past 30 days, despite an uptick in showers,” she said, adding that “the soil moisture deficit is still 131mm in the state, reflecting intense drought in January”.

And is dryness any more such a bad thing?

Minneapolis-based broker Benson Quinn Commodities said that gains in soybean futures on Monday may have been fuelled by “the midday forecast that turned wetter for Brazil over the next eight days, which could slow harvest activity”.

Conab factor

It would be some lead if investors had an updated report from Brazil’s own, respected, crop bureau, Conab, to call on.

But that is not due until Thursday, leading to some to believe that the USDA will be reluctant to act today.

The dearth of a Conab report for now is “leading some to believe that the Wasde will not make any major adjustments to Brazilian corn and soybean production”, Richard Feltes at Chicago-based RJ O’Brien said.

‘Fantastic weather’

Meanwhile, even if Brazil’s harvest prospects have weakened, those for Argentina have improved.

“We see the Brazil situation meaning the harvest estimate has to decline 1.5m tonne,” said Allendale’s Rich Nelson.

“But that is pretty much offset by a higher Argentine crop. Argentina has had fantastic weather the past couple of months.”

Morgan Stanley’s Bennett Meier said: “Changes to Brazilian and Argentine production… will largely net each other out.”

‘Drop off like a rock’

Heading back to the US balance sheet, South American production will be a key factor in determining US export potential this season.

In soybeans in particular, a strong start to 2014-15 for shipments – up 17.6% at 38.95m tonnes so far – has raised hopes among some commentators that the USDA may lift its estimate for full-season exports.

But not for Mr Nelson, who said that US exports “will be front-loaded.

“We think it will be like last season, when we had record crop in South America, and there was a sharp decline in US exports when that was established”.

Mr Roose said: “We will US soybean exports will drop off like a rock.”

Dent to Chinese demand?

And this is before getting to talk of small line-ups of vessels queuing to load at Brazilian ports, which some see as a sign of lower Chinese demand rather than of the US stealing South American volumes.

“China liquidated about 6m hogs last year, equivalent to the entire breeding herd of the US,” Mr Roose said.

“That has got to have had some impact on their feed demand.”

There is enough uncertainty about, anyway, to allow the Wasde some cause of controversy, and make the report worth a read before returning to anticipating next week’s USDA outlook forum.

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