USDA Reports Review

The extent of the changes on the January USDA grain stocks and production report seemed to catch many, including yours truly, by surprise. Perhaps commodity fund managers weren't as surprised, as they carried sizable long positions on corn, beans and soy meal into Thursday's bullish report. A combination of lower-than-expected production, stocks and harvested acres data brought buyers into the grain and soy markets, sending each of the markets to sharp gains.

CORN

This was a report that was expected to show only minor changes for corn, both on the U.S. and world balance sheets. On the U.S. side, traders were looking for a modest 8-million-bushel (mb) drop in production and little change in either yield or harvested acres. USDA instead slashed harvested acres by a hefty 1.6 million acres (ma) to just 79.2 ma, while raising yield to 173.3 bushels per acre (bpa) from 172.3 bpa in December, resulting in a crop of 13.73 billion bushels (bb) -- 200 mb below that of December and well under the trade estimate. Additional demand changes were feed and residual, down 25 mb; food, seed and industrial (FSI), down 10 mb; and exports lowered a greater-than-expected 150 mb to account for the slow pace of exports (down 47% versus last year). Ending stocks changed very little, dropping 15 mb from December, with the trade expecting about 60 mb higher than the 1.242 bb carryout. Dec. 1 corn stocks of 10.8 bb were down sharply from Dow Jones' pre-report expectations of 11.19 bb and down 7% from last year.

On the world side, the focus seemed to be on what changes might be made to Argentine corn production in the face of the extreme drought conditions. As expected, USDA took a conservative approach, lowering production by only 3 million metric tons (mmt) (118 mb) from their December forecast to 52 mmt (2.04 bb). That is still as much as 6 mmt to 7 mmt (275 mb) higher than some private estimates that we have seen. Brazil's crop was also reduced by 1 mmt, but to a still record-large 125 mmt (4.92 bb). Ukraine's corn crop remained unchanged, but exports were increased by 3 mmt to 20.5 mmt (807 mb) to account for the Black Sea Grain Initiative shipments, and Ukraine feed use was lowered by 1.5 mmt. China's corn crop was increased by 3.2 mmt to a record 277.2 mmt (10.9 bb), and China's feed use was increased by 2 mmt. World ending stocks on corn, expected to fall just modestly to 298 mmt, instead fell to 296 mmt (11.65 bb).

Overall, the corn numbers on the supply side were bullish, overcoming much of the bearish export, ethanol and feed usage that we have seen. March corn was trading lower prior to the report and finished the day up 15 cents per bushel.

SOYBEANS

U.S. soybean production was pegged at just 4.276 bb -- down 70 mb from December, as yield declined by 0.7 bpa to 49.5 bpa, and harvested acres fell 300,000 below that of December to 86.3 ma. Dec. 1 soybean stocks were a shocking 3.020 bb compared to December, at 3.152 bb, and trade expectations were for something just under that. Soybean export sales were ratcheted down by 55 mb to 1.99 bb to account for the slow pace of shipments and larger Brazilian soy crop expected. Ending stocks of U.S. soybeans fell to a tight 210 mb, down 10 mb, when the trade was looking for a 236 mb carryout.

More significant changes occurred on the world side, with the most notable being a decline in Argentine production. USDA, as in corn, has been carrying an artificially high production of 49.5 mmt (1.82 bb). That was reduced by 4 mmt to 45.5 mmt (1.67 bb) to account for the extreme drought, and that could still be high by 3 mmt to 4 mmt if rains don't show up soon. Brazil's soy crop was increased by 1 mmt to a record-large 153 mmt (5.62 bb). China's soybean crop was raised by 1.9 mmt to 20.33 mmt (747 mb). However, China imports were lowered by 2 mmt to 96 mmt (3.53 bb), and China crush fell by 1 mmt to 95 mmt. Argentina's crush was reduced by 1.75 mmt to 38 mmt, and Argentine exports fell 2 mmt to 5.7 mmt (209 mb) to account for the smaller crop, while Brazil soy exports were increased by 1.5 mmt to 91 mmt (3.34 bb). Global soybean ending stocks were pegged at 103.5 mmt (3.8 bb), up 800,000 mt from December.

March soybeans, prior to the report, were trading up just 4 to 5 cents, but by day's end, March finished 25 1/2 cents higher, with March meal up nearly $7 per ton to a new contract high, and March bean oil closing up 1.20 cents. The soybean season average price was increased by 20 cents to $14.20, while soymeal average price rose $15 per short ton, and bean oil was left unchanged.

WHEAT

There were few expected changes for the wheat market coming into the report, but there were still some surprises. Wheat ending stocks were expected to rise by 11 mb and instead came out 4 mb lower at 567 mb. Dec. 1 wheat stocks were lower than expected, at 1.280 bb, down 7% from December. Feed and residual was raised by 30 mb to account for higher second-quarter disappearance than expected. Seed use was increased by 3 mb. Traders had expected Dec. 1 stocks to be 1.347 bb, but the 1.280 bb turned out to be the lowest since 2007. The decrease in stocks came in mostly soft red and white winter wheat, while hard red stocks rose by 15 mb.

World wheat changes were minimal. With traders braced for a possible rise in both Australian and Russian wheat production, those were left unchanged, while Argentina also was left alone. Both EU and Ukraine wheat exports were raised by 500,000 mt to 36.5 mmt and 13 mmt, respectively, while world ending wheat stocks rose by 1 mmt to 268.3 mmt (9.86 bb) -- about as the trade expected.

Winter wheat seedings were much higher than expected, at 36.95 million acres, up 11% versus last year and a full 2.5 million acres higher than the average trade estimate. Hard red winter, at 25.3 ma figure 20% higher, while soft red, at 7.9 ma was up 10%, and white wheat figures to be up 3%.

Prior to the report, wheat was trading lower, and even though the report was mostly neutral to even bearish for wheat, the market rallied in sympathy with corn and soybeans and on oversold conditions.

The net effect of the January World Agricultural Supply and Demand Estimates (WASDE) report was to tighten up balance sheets a bit more, with all three markets finishing strong, and soybean meal once again scoring a new contract high, fueled by Argentine production woes. With lower-than-expected December stocks in each market, corn and soybeans were able to overcome the bearish demand data, which saw combined exports drop by 220 mb. Argentine weather will now be the primary focus again over the next 30 days.

Dana Mantini can be reached at dana.mantini@dtn.com

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