USDA Reports Review

By Darin Newsom
DTN Senior Analyst

I'm sure you know the old joke: Why did the chicken cross the road? Well, we now have a new lead-in: Why did soybeans rally more than 30 cents following the release of USDA's January reports?

New-crop July Kansas City hard red winter wheat (HRW) up 14 cents on strong commercial buying is easy to understand. After all, USDA pegged winter wheat plantings at 32.4 million acres, which was below the average pre-report estimate of 34.2 ma and was 3.7 ma (keep that number in mind) under last year's 36.1 ma. Reportedly, from other media sources, this is the lowest U.S. winter wheat planted area since 1909.

And thank goodness for that, for acreage was about the only bullish number wheat had Thursday. USDA pegged wheat quarterly stocks as of Dec. 1 at 2.073 billion bushels, implying second-quarter demand of 454 million bushels, or 20.4% of total projected demand of 2.224 bb. The percent was slightly below the five-year average of 20.9%, keeping first-half demand behind pace and projecting an ending stocks figure of 1.194 bb. This calculation is slightly above USDA's January figure of 1.186 bb and up from December's 1.143 bb, and carries with it an ending stocks-to-use ratio of 53.3%, the highest in 30 years.

World wheat ending stocks were increased to 253.29 million metric tons, but that number remains misleading with China reportedly holding 111.59 mmt (approximately 44%) of world ending stocks, and not looking to do much exporting (0.8 mmt). Of the world's largest exporters, the U.S. balance table is the most -- well -- unbalanced. The only group close to the U.S. ending stocks situation of 32.29 mmt is the 12 nations of the former Soviet Union at 22.11 mmt. However, its exports are expected to be more than double those of the U.S. Thank you, strong U.S. dollar and weak Russian ruble.

Why did corn do almost nothing at all? Because it's corn. Badda bing, badda boom. The market is lying prone in its sideways price pattern like a once-great, now-bloated king stretched out in a recliner. Sure, production came in lower than expected at 15.148 bb, down from December's 15.226 bb due to reduced acres and a slightly lower national average yield of 174.6 bushels per acre. And, yes, domestic ending stocks dipped to a projected 2.355 bb as compared to December's 2.403 bb. But demand was lowered 25 mb as a result of a 50 mb decrease in feed and a 25 mb increase in ethanol. But despite all that, the market was showing a loss late in the day, and would have closed lower if not for the aforementioned rally in soybeans.

The wrench in the system seemed to be the always-amusing quarterly stocks corn figure of 12.384 bb that was only slightly higher than the pre-report average estimate of 12.358 bb. This implied first-quarter demand of 4.556 bb, easily the largest on record. On the other hand, quarterly demand accounted for 31.2% of projected total demand, slightly behind the five-year average of 31.8%. Furthermore, the quarterly stocks number amounted to 73.1% of estimated total supplies, well above the five-year average of 71.1%. Carrying the quarterly stocks number forward through the end of the marketing year, using average quarterly demand, results in an ending stocks figure of 2.427 bb. With the threat of front-loaded demand being seen in Q1, that last number could grow larger as the quarters pass, and possibly why traders were initially selling the corn market.

Why did soybeans rally? Well, production did surprise by coming in lower than expected at 4.307 bb as compared to December's 4.361 bb. The general consensus going into the reports was that U.S. production would increase. But harvested acres and national average yield were trimmed slightly, and while total demand was left unchanged at 4.108 bb, ending stocks fell by 60 mb to 420 mb.

I'll admit, this made me smile. USDA is nothing if not predictable when it comes to overestimating domestic demand for soybeans, and this 60 mb erasure could be the first of many. In fact, taking the quarterly stocks figure of 2.895 bb reflected quarterly demand of 1.712 bb, or 41.4% of projected total demand for 2016-2017. Unlike the other grains, if we carry this number forward with average quarterly demand, ending stocks would be calculated at 313 mb.

That may be an overstatement as well. If we use the last three years as a guide, USDA has decreased its U.S. ending stocks estimate by about 64% from its peak to the final figure of the following September Quarterly Stocks report. If that is the case again for 2016-2017, ending stocks would be projected at 171 mb.

But soybeans have a number of fences between it and a bullish stampede. Like corn, demand may have been front-loaded in Q1 with a potential trade war between the U.S. and China brewing post-Inauguration Day, and Brazilian harvest of an expected 104 mmt drawing nearer. Either, or both, of those could put a halt to boats loaded with beans leaving U.S. ports in the months ahead. And then there's the question of new-crop. Not only are soybeans expected to land most of the unplanted wheat acres (3.7 ma), the November soybean/December corn ratio of 2.6:1 is likely high enough to buy some corn area away as well. If the March 31 Prospective Planting report rolls around and expected bean acreage is above early estimates of 88.6 million (as compared to 2016's 83.4 ma), things could get ugly quick for the new-crop market.

But that is then and this is now. So for the last time: Why did soybeans rally more than 30 cents following the release of USDA's January reports?

Because it was a Christmas present. No further logic required.

Merry Christmas.

The new year in grains starts now.

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

(AG/ES)

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