Market Matters Blog

Going into the July USDA Supply and Demand reports, the key looked to be what number the government would pull out of its hat in regard to new-crop corn ending stocks. The bottom line is the report showed an increase of 10 million bushels, raising the ending stocks-to-use ratio to 15.4% from the 15.2% calculated in June.

Tracking the changes, one has to go back to the 2012-2013 marketing year. Total supplies were increased by a 10 mb adjustment to exports, leaving the production number at the still-questionable 10.78 billion bushel mark. Feed demand was upped by 50 mb to 4.45 bb, increasing total demand by a like amount and resulting in a 40 mb decrease in ending stocks to 729 mb.

This ending stocks number was rolled forward to beginning corn stocks for 2013-2014, but was helped slightly by imports being raised 5 mb to 30 mb. The heavily anticipated production number came in just below 14 bb at 13.95 bb, using the June 28 harvested area of 89.1 million acres and leaving national average yield at 156.5 bushels per acre. The latter once again illustrates the disconnect between various branches of the government, as USDA's own weekly crop condition numbers that showed improvement over the last few weeks were ignored. Demand fell by 100 mb as feed and exports both were reduced 50 mb.

The end result is an "official" view of fundamentals that remains bearish. The market responded with an immediate sell-off, before bouncing back to near unchanged before a half-hour had passed.

The other big question heading into the July report was how USDA would handle an ever-tightening supply situation in soybeans. The answer was what it normally is with USDA: Ignore it in hopes it simply goes away when harvest begins this fall. The strong inverse in the old-crop market combined with historically firm basis continue to indicate domestic supplies are much less than the USDA's June estimate of 125 mb. All categories of old-crop supply and demand were left unchanged, despite exports continuing to run 5% ahead of pace needed to meet the projected 1.33 bb. If this 5% were accounted for, it would push old-crop export demand to about 1.395 bb, theoretically dropping ending stocks to 60 mb. This number would be closer to the estimated 5 mb of ending stocks using USDA's own third-quarter stocks number of 435 mb and subtracting off average fourth-quarter demand.

Domestic new-crop ending stocks inexplicably increased 30 mb to 295 mb due to a like jump in production. USDA applied its new harvested acreage number of 76.9 ma, the only change seen on the entire new-crop supply and demand table. Ending stocks of almost 300 mb and ending stocks-to-use of 9.0% are diametrically opposed to the bullish outlook the market continues to show in the new-crop forward curve (series of futures spreads from the November 2013 contract through the August 2014).

Changes in wheat began with an adjustment to beginning stocks (2012-2013 ending stocks) of 28 mb. This occurred as a result of a number of minor changes, most curiously a 3 mb increase in seed demand, and a larger increase of 28 mb in feed demand. As for new-crop, all-wheat production increased by 34 mb over the June estimate of 2.08 bb due to better-than-expected yield projections for winter wheat. The net result was a 6 mb increase in total supplies.

Wheat demand increased by 89 mb on the combination of exports being raised 100 mb to 1.075 bb and a 10 mb decrease in feed demand. The end result was an ending stocks figure of 576 mb, 83 mb less than what was projected in June.

The takeaway from the July report is that the market traded it in less time than it took to write this review. By noon CDT, or one hour after the release of the report, corn and soybeans had posted a sharp sell-off before turning higher once again. Wheat contracts held their own throughout the hour, trading near recently-established session highs. It seems traders, particularly in corn and beans, may finally be turning their attention back to the weather and away from the folly that is government reports.

And, we can't forget the lengthening shadow of inflation created by the collapse in the U.S. dollar index late this week following the release of the Fed's June meeting minutes. Investment traders play a huge role in the direction of commodity markets and, regardless of USDA numbers, could start to rebuild long futures positions if the idea of a weakening dollar gains momentum.

Darin Newsom can be reached at darin.newsom@telventdtn.com