Newsom on the Market

By Darin Newsom
DTN Senior Analyst

It was shortly before 11 a.m. (CT) this past Tuesday. Curious onlookers were gathering in front of the big-screen monitor in the back of the DTN building at Husker Harvest Days. I had hooked my laptop up to this monitor, and was on the front page of my DTN ProphetX system, the one that shows all the markets as they change tick by tick. A few seconds until 11 and corn was down about 4 cents, soybeans were off 2 or 3 cents, if I recall. The clock struck 11, and corn promptly dropped to a loss of 10 to 12 cents, putting cell backgrounds into deep red. Similarly, soybeans changed to a darker crimson as losses quickly escalated to 15 cents or more. The crowd let out a collective groan.

Without even looking at the numbers, we knew USDA's September Crop Production and Supply and Demand reports had been bearish.

Creating some consternation from those who wanted to study USDA's numbers further, I immediately went about the business of putting together my post-report webinar for DTN that was to be done live from the DTN building. This meant paging back and forth from DTN's Report Flash to the various workbooks I was updating or the PowerPoint itself. Each time I went back to the numbers, the crowd leaned in to get a closer look. Each time I went to my workbooks there was quiet grumbling.

They wanted to know what had caused them so much pain. And I was going to tell them at the top of the next hour.

By the time the webinar got rolling, we not only had solid attendance online, but an estimated 50 people or more had filled the back of the building to watch live. As one of my colleagues would tell me later that afternoon, the energy throughout the building was electric.

And it was in that charged atmosphere I did my best to analyze what we had just seen (the rebroadcast of this month's webinar has been posted on DTN online sites).

I went through my presentation slide by slide, a set that included some of my favorites: U.S. corn production (with this year's lower acres and "weather-ravaged" crop projected to produce the 14.184 billion bushels, the third-largest on record); U.S. wheat projected ending stocks and ending-stocks-to-use (the latter coming in at a still whopping 43.6% despite the smallest area planted in a hundred years or so), and the study tracking USDA's ever-changing U.S. ending stock projections (the one that concludes with an average decrease over the 15-month reporting period of 63%). But what I was most interested in talking about, particularly in regards to corn and soybean new-crop supply and demand, was all we still didn't know.

Let's start with old-crop ending stocks that become new-crop beginning stocks. We won't get this figure until the Sept. 29 quarterly Grain Stocks report (stocks on hand as of Sept. 1), and as the above-mentioned soybean chart shows, significant changes can still be seen from this past week's official guesses of 2.350 bb (corn) and 345 million bushels (soybeans). So we have to leave that spot blank on our supply and demand table.

USDA isn't required to incorporate FSA planted acreage data until the October report, though those numbers can be changed up through at least January. So we can't pencil anything into that space yet. It stands to reason then that if we don't know planted acres, we really shouldn't be making guesses on harvested acres either. So that space stays blank as well.

National average yield won't be finalized until January. Without that, and given we don't know what harvested area actually is, it is impossible to calculate.

As far as supply categories go, that leaves imports. There, if we wanted to, we could average the last four years and round to the nearest 10 to come up with 50 mb of corn. If we do that, it would give us known total supplies, for the 2017-18 marketing year, of 50 mb. Oddly enough, that's where USDA's imported corn guess is for now. In soybeans, we could stick with USDA's current guess of 25 mb for 2017-18.

Or we could just leave the import space blank until the September 2018 quarterly Grain Stocks report.

The process would be similar in demand. Of the three major legs of demand for U.S. corn (feed, ethanol, and exports), only ethanol shows a modest range the last four years to calculate an average. Doing so gives us an estimate of roughly 5.3 bb. The two major components of soybean demand (crush and exports) show a great deal of variability, so this will be left alone until subsequent quarterly Grain Stocks reports shed more light on disappearance.

Therefore, given all we can say we think we know about corn and soybeans, the singular conclusion is, "The U.S. will be short of corn by roughly 5.25 bb." How do we arrive at that insane bottom line? By subtracting the only supply category we might be close to guessing, imports, from the similarly deduced ethanol demand estimate.

But as discussed, there are so many more variables. So much that we still don't know, can't know, about the 2017 crop and 2017-2018 supply and demand.

Given that, it begs the question once again, why do we get so wrapped up in this silly guessing game every month?

The postscript on the markets is that December corn closed Thursday within 3 cents of this past Monday's settlement, or roughly priced where it was before the release of USDA's big production number. November soybeans have rallied 16 cents above Monday's close, almost 40 cents off Tuesday's low that was nothing more than a knee-jerk reaction to the record large production guess of 4.431 bb.

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

Follow Darin Newsom on Twitter @DarinNewsom

(SK/BAS)

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