Though it's February, in the dead of winter here in the United States, imagine yourself mowing your yard on a beautiful spring day. As you make your way over the dark, green grass, the drone of the mower engine drowning out all other noise, you run over a dandelion that has already reached maturity. The fuzz (seeds) are sent scattered into the wind. In that fraction of a second it crosses your mind that it's no big deal now, but it could create more dandelions in your yard at a later date. Then, that flash of a thought is gone as you swerve to avoid the unwanted gift left by the neighbor's dog before you step in it.
This is how I viewed Thursday's USDA reports, the government's monthly round of guesses that amount to little more than annoying weeds in the markets' yards. What interested me most, as usual, was not the made-up numbers but how the markets reacted. To me, and likely only to me, it speaks volumes about the continued evolution of Watson and the relationship between these reports and the trade they are meant to influence.
Think back to Thursday, and recall the main topic of conversation following the report. The bulk of what I saw and heard was wonderment at the fact soybeans were not down 15 cents, 20 cents, more due to USDA increasing domestic ending stocks to 530 million bushels (mb), based on a 60-mb decrease in its U.S. export demand projection. Within two minutes of this bearish number being released (the average pre-report estimate came in at 495 mb), strong commercial buying had pushed old-crop March soybeans to a gain of nearly 8 cents. After catching its breath for a few moments, the March contract raced 14 cents above Wednesday's close of $9.82.
Lost in all that, though, was the 11 a.m. CST flash trade just as the numbers were released. March soybeans dropped about 9 cents from where they were the second just before the USDA's numbers. By the time that first minute had elapsed, the contract had already gained back 4 of those pennies.
The reaction seen in February isn't an outlier either. I've been watching markets and reports for a number of decades now, and the pattern I see is the government's influence on grain trade is diminishing. Again, USDA could only sway soybean trade for less than a minute -- not even 60 seconds -- with its bearish guess at domestic soybean ending stocks.
Why? The answer is simple: Computers are getting smarter, as are traders. Algorithms are being designed to largely ignore USDA's guesswork, because of the poor track record easily accessible to all. Those familiar with my analysis recall that the previous four marketing years have seen USDA decrease its domestic ending stocks number by 57% from the peak guess during the 17-month reporting period leading up to the final September Quarterly Stocks report. This pattern is too consistent to be viewed as accidental, but rather systematic. If you were a computer programmer, what would you fill your soybean trading algorithms with? USDA's imaginary ending stocks numbers or actual weather data streaming out of South America this time of year?
On the other hand, the question of whether or not U.S. exports needed to be decreased should be addressed. The answer is yes. Through the latest weekly export update, through Feb. 1, marketing year shipments of soybeans sat at 1.277 billion bushels (bb). Average percent shipped (of what turns out to be the total) at this time is 60%. Simple math can then be used to project total U.S. soybean export demand to be roughly 1.85 bb, or 250 mb below USDA's latest guess. This is one of the big issues the U.S. soybean market is going to have to face down the road.
Speaking of export projections, those looking at corn have to be scratching their heads as well. After Thursday's early-day weekly export update, total marketing year corn shipments were 582 mb. The average percent of total demand shipped at this time is 33%, putting total projected exports at approximately 1.760 bb. In its February report, USDA upped its guess from January's 1.925 bb to a 2.050 bb, or 290 mb above what the actual math shows.
If USDA is overestimating export demand by nearly 300 mb, what are the ramifications for domestic ending stocks? USDA's ending stocks guess for February came in at 2.352 bb, putting ending stocks-to-use at 16.1%. But, if export demand is projected 290 mb too high, it is feasible to argue that domestic ending stocks will ultimately come in closer to 2.642 bb.
Think back a minute to my analysis following the January Quarterly Stocks report for stocks on hand as of Dec. 1. Corn stocks came in at 12.516 bb, putting first quarter demand at 4.431 bb. Given that on average (both long-term and short-term) first quarter demand equals 31% of what total marketing year demand turns out to be, and using 16.947 bb as total supplies, I came up with 2017-18 ending stocks of 2.663 bb. Look to see how that compares to the possible USDA number of 2.642 bb if export pace was actually accounted for.
Despite USDA's weirdly bullish corn math, corn showed little interest in rallying post-report Thursday. When combined with the reaction in soybeans, it is becoming more evident that the trade views these reports more as annoying weeds, whose seeds may have to be dealt with later.
Just like dandelion fuzz.
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