Adding Insult to Injury

The quarterly USDA Grain Stocks reports have a reputation for surprising the markets, and the Sept. 28 report was no exception.

Corn, soybean and wheat supplies on Sept. 1 were all larger than the average trade guesses going into the report and above the upper end in the case of soybeans. It could be termed "adding insult to injury" because unsold soybean stocks were already projected to be record large in 2019 at 845 million bushels following the Sept. 12 crop report.

USDA found 438 million bushels (mb) of old-crop beans sitting around on Sept. 1 and concluded two things: First, that last year's production must have been 19.1 mb larger than they thought back in January, and secondly, that residual use must have only been 8 mb last year rather than the 32 million the World Agricultural Outlook Board had been using. The extra 43 million bushels from 2017-18 are added to the 845 million already projected for 2019, forcing us to consider ending stocks of 888 mb next year if nothing else changes.

The market was already sickly, but that new stocks number would be close to triple recent carryover stocks. A 50-bushel-per-acre yield would mean that we had 11 million acres of 2019 production already harvested and in the bin.

Granted, "if nothing else changes" is a ridiculous conditioning statement. Low prices cure low prices, and a price drop will likely find more U.S. crush use and more soybean exports than are currently assumed. USDA, and the industry, have both consistently underestimated global crush and export demand early in the season.

Corn was insulted as well. We were looking at a nice orderly tightening of U.S. and world ending stocks, with the U.S. dropping from 2.293 billion bushels last year to 2.002 bb this year and 1.774 bb for 2019. The projected world stocks-to-use ratio in the September World Agricultural Supply and Demand Estimates (WASDE) report was the tightest since 2000 and getting tighter as China promoted using a corn/lysine hog ration to cut the need for soybean imports.

The National Agricultural Statistics Service (NASS) survey found 2.140 billion bushels of old crop sitting there, i.e. 130 million more than anticipated by the trade average guess and 138 million above the Sept. 12 report. As with beans, that would flow to the 2019 ending stocks unless price drops stimulate additional consumption.

It's anticipated that WASDE could cut the feed and residual (F&R) use estimate for last year by at least 50 mb, and could drop as much as 100 million, depending on the final results from the Grain Crushing report on Oct. 1.

A look at some regional detail can help us determine where the extra bushels were located. This has basis impact. The five Western Corn Belt states drew down their corn stocks 9.3% from a year ago, with Kansas the glaring exception. The three Eastern Corn Belt (ECB) states' year-end inventory grew 1.04% from last year, with most of that gain in Ohio. Ohio was up 31% from last year and staring at the largest carryover since 1988 for that state at 85.8 mb. Illinois still had the biggest pile (375.4 mb) in the ECB, but good fourth-quarter export use whittled it down.

You may wonder if the early harvest this year resulted in more new-crop bushels showing up in the Sept. 1 stocks. After all, Texas starts combining in July and several states are running in August.

USDA is pretty specific in its stocks survey that only old-crop bushels are counted. However, new-crop availability can mean more of the new crop was fed or exported out of New Orleans before Sept. 1 than was the case a year ago. If so, some old-crop bushels could have been sitting there that would have otherwise been gone. The only way we can cross check this is to look at the Sep-Nov use when it comes out next January in the stocks report. That is really July-Nov use for new crop, and if F&R were to be unusually large, it might suggest some pulling ahead had been done.

For now, we just know that the futures rally over the past two weeks was mostly shorts-taking profits ahead of the end of the quarter rather than anything fundamental. Prices will get too cheap, and they will find a harvest bottom or perhaps confirm that one was seen a couple weeks ago.

It takes a while for injuries to heal.

Alan Brugler can be reached at alanb@bruglermktg.com

(BE/AG)

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