We had another pair of end-of-quarter USDA NASS grain reports Friday and another HUGE surprise for the markets. Corn futures settled as much as 35 cents per bushel lower Friday, and soybeans were up more than 80 cents at one point. November beans settled 77 1/2 cents higher, and soy oil futures were locked limit up. Those moves lit up the price quote screens and led to some amazed comments out in the country like "Would ya look at that!"
Why the big moves? And are there more to follow?
First, let's examine the why. These end-of-quarter reports (Grain Stocks and Planted Acreage in this case) have an outsize influence on prices because spec funds and other market players are making end-of-quarter position adjustments at the same time. Those with asset allocation models are cashing out their winners for the quarter and looking to buy undervalued commodities for the next quarter. That means a lot of money sloshing around regardless of what USDA shows. We had some steep price swings in June, so there were some motivated buyers and sellers. In this instance, the volatility was compounded by the proximity of the July 4 national holiday and a lame-duck trading day on Monday sandwiched between the reports and the holiday. Many will take that day off to create a four-day weekend, putting more urgency into taking action on Friday. Thus, we had a can of gas just waiting for a match.
USDA does these particular surveys to square up and fact-check their other data. The monthly Crop Production and WASDE reports try to keep both commercial and spec traders abreast of the supply and demand situation. Their weakness is in the variables that aren't measured, such as feed and residual use. Our definition of residual use is "It's gone, and we don't know where it went." Feed consumption by several hundred million animals spread across 50 states is very hard to measure, and it is easier to just measure the beginning grain inventory, the ending inventory and subtract the known uses to come up with a derivative number. That's what the Grain Stocks report accomplishes. Those numbers were modestly bull-friendly Friday, with corn stock expected to be about 100 million bushels (mb) below last year and actually down 243 mb. Soybean June 1 stocks at 796 mb, and wheat ending stocks of 580 mb were also just a touch tighter than the average trade guesses. They weren't the cause of Friday's price volatility.
The actual acreage planted and which crops are in that field are still question marks in June. The satellites are a lot better at sorting things out in September when there is more to look at. High fertilizer prices last fall, heavy snowpack in the upper Midwest this spring, and very dry conditions from Nebraska to Indiana all raised questions about how much corn U.S. producers would plant. In the end, USDA found producers increased corn plantings to 94.096 million acres, the third most ever and the highest since 2013. That was up 2 million from March intentions, and all of it came out of soybeans. In fact, soybeans were down 4 million from March, as some other crops also attracted additional acres. With improved rains in the Southern Plains and western edge of the Corn Belt, sorghum acres rose 13.9% from the spring plans, magnifying the additional supply from the corn acreage shift.
How large was Friday's surprise for corn acres versus other years? In percentage terms, it was the largest jump from March since 2009 at 2.3%. When compared to the average trade estimates published by Reuters, it was a 2.4% surprise and the biggest since 2019. What are the odds that the USDA number in January 2023 is smaller? Since 2005, the June corn acreage has been 100.7% of the final acreage, i.e., slightly high. It has only been under the final acreage five times in that span.
What comes next after a more-than-70-cent pop in soybeans and a more-than-30-cent drop in corn? A statistician would suggest mean reversion -- that prices will eventually try to fade the size of the move. Fundamentally, we know acreage is only part of the equation. The percentage of the crop actually harvested times the average yield generates the production number. Those two variables are still in play because of weather. Last week's derecho across Illinois, Missouri and surrounding states did some crop damage, the extent of which has yet to be determined. The dry weather pattern from May and June also appeared to be breaking down somewhat for the first half of July. If that trend holds, crop condition ratings will start to improve. We're a long way from putting this stuff inside the bin and locking the door!
Alan Brugler may be contacted at firstname.lastname@example.org
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