USDA Reports Review

OMAHA (DTN) -- The USDA, in its December World Agricultural Supply and Demand Estimates (WASDE) and crop production report released Tuesday, surprised traders with a much larger change in corn demand for the year.

Corn used for ethanol and corn exports were increased by a combined 200 million bushels (mb). Corn export sales were raised 150 mb, to 2.475 (billion bushels (bb), while corn used for ethanol rose by another 50 mb, to 5.5 bb, with both of those changes going right into the ending stocks number.

Traders reacted to the tighter supply with strong buying, and it is likely that funds, entering the report with a net-long corn position of more than 100,000 contracts, added to their bullish bet. Wheat and soybeans were mostly neutral to a bit bullish following the report.

Let's take a closer look at some of the changes in both U.S. and world numbers on the Dec. 10 report, starting with corn.

CORN:

The Dow Jones pre-report survey of 19 analyst firms hinted at just a minor upward revision in both corn ethanol use and exports and traders expected a modest 51-million-bushel (mb) drop in ending stocks. But the USDA report surprised with a 200-mb decline in ending stocks to 1.738 bb.

Traders had been looking for ending stocks to come in at 1.887 bb. The decline was the result of raising ethanol usage by 50 mb to 5.5 bb, combined with a 150-mb rise in the yearly export sales to 2.475 bb. With the corn export pace running mor than 30% higher than last year and ethanol production recently featuring two record-large production months, the strong demand is certainly not a total surprise.

However, few seemed to expect the ending stocks to fall by 200 mb. The corn market reacted accordingly. March corn, up just a half-cent before the report, rose more than 7 cents by the close to $4.49. The revised corn demand at 15.19 bb is a record demand, eclipsing the old record by more than 220 mb. Surprising with the sharply higher demand outlook is that China has been missing in action as a U.S. corn buyer. Despite the increased demand outlook, the season's average price for corn was left unchanged, at $4.10 per bushel.

On the global front, there were other changes with less of an impact in the corn balance sheet. However, the net result was that world corn ending stocks, expected to be down less than 1 million metric ton (mmt), instead fell by 7.7 mmt, to 296.4 mmt (11.7 bb), with much of that related to the record demand of 15.190 bb in the U.S.

Production changes in both the EU and Mexico fell 800,000 mt, while Ukraine production increased 300,000 mt. Imports for both the EU and Mexico were increased by 500,000 mt to 19.5 mmt (767 mb) and 24.5 mmt (964 mb), respectively. Some minor feed changes were Brazil increasing by 1 mmt, and Ukraine and the EU up by a combined 1.1 mmt. On the export side besides the U.S., EU corn exports were dropped 800,000 mt to 2.5 mmt (98 mb).

March corn finished up 7 1/4 cents at $4.49 and at the highest level since Oct. 1.

SOYBEANS:

On the soybean side, the USDA chose to leave both U.S. crush and exports unchanged, leading to an unchanged ending stocks level of 470 mb, and about as the trade had expected. Also as expected, the USDA raised U.S. soybean oil exports by 500 million pounds, to 1.1 billion pounds. The change made plenty of sense, since U.S. soybean oil is now the world's cheapest veg oil, and the export pace with bean oil already exceeding the USDA November export estimate by close to 60%. The season average price on soybeans was dropped 60 cents to $10.20 per bushel, likely on the prospect of the record large South American crops. The season average on soymeal was lowered by $20 per short ton to $300/st. The soybean oil season average price remained at 43 cents per pound.

Globally, world soy production rose by 1.7 mmt, to 427.1 mmt (15.7 bb). Canadian production fell by 1.1 mmt. Argentina's soy crop was raised by 1 mmt, to 52 mmt (1.91 bb), to account for larger acreage, and crush was increased by the same amount to 41 mmt (1.5 bb). The world ending stocks of 131.9 mmt (4.85 bb), though about 1 mmt lower than trade expectations, is still up nearly 20 mmt (735 mb) from last year and a record large carryout.

January soybeans finished up 4 3/4 at $9.94 3/4 and at about the same level it was trading prior to the report.

WHEAT:

Traders expected no change in the U.S. wheat balance sheet, but USDA raised exports by 25 mb and imports by 5 mb; this sent the ending stocks on wheat down 20 mb, to 795 mb. Some minor by-class changes resulted, with white wheat exports up 15 mb, soft red wheat exports up 5 mb and the same with hard red spring wheat.

It was the world numbers that wheat traders were focusing on, and following Russia's cap on second-half exports, traders had expected a decline in Russian wheat exports. They got that decline, but it was only 1 mmt, to 47 mmt (1.73 bb). Traders and analysts feel like we will see possibly another 3 mmt to 5 mmt decline in Russian exports down the road. Other world changes were minor. EU wheat production fell by 1.3 mmt, to 121.3 mmt (4.46 bb). Brazil production fell from 8.5 mmt to 8.1 mmt (297 mb). EU exports fell by 1 mmt, to 29 mmt (1.06 bb), and Ukraine exports were lowered by 500,000 mt, to 16.5 mmt (606 mb). Wheat imports for China fell from 11.5 mmt to 11 mmt (404 mb). World ending stocks on wheat moved up 300,000 mt to 257.9 mmt (9.5 bb) and slightly above expectations.

The report on wheat was neutral to a bit bullish, but Kansas City wheat was able to finish 7 cents higher, to $5.65 3/4, getting some support from the surging corn market.

FINAL THOUGHTS:

The corn portion of the December WASDE was surely a bit of a bullish surprise to traders and is a testament to the pace of sales and recent record ethanol production. However, March corn is getting into an area of strong resistance and that, coupled with robust production expectations in South America, could make further gains a challenge. The focus will again turn to weather in South America.

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

Follow Dana Mantini on Twitter @mantini_r

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