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Brugler: USDA Throws a Curveball

USDA raised the national average soybean yield estimate to the second highest ever in its report this week. (DTN photo by Pam Smith)

USDA threw the market a curveball on soybean production Wednesday, raising the national average yield estimate to the second highest ever at 46.9 bushels per acre and bumping up estimated U.S. production to 3.916 billion bushels.

This resulted in the largest disconnect or "miss" ever between the average trade guess (stocks or production) and the August number released by USDA. The market price ahead of the report is at least somewhat related to the production expectation and more directly related to the stocks-to-use ratio. A big miss tends to result in a big rally or big selloff, and we had the latter on Wednesday. The question is: What comes next?

The larger-than-expected production number flowed through to projected ending stocks. Instead of seeing stocks drop to 322 million bushels, the average trade guess a couple days ahead of the report, the USDA ending stocks estimate rose from 425 mb to 470 mb. That is a stocks-to-use ratio of 12.6% and is much more comfortable than the 6.2% currently projected for the soon-to-end 2014/15 marketing year or the extremely tight 2.6% from 2013/14. USDA's cash average price estimate reflects the looser forecast, with a range of $8.40 to $9.90 seen for the upcoming marketing year, or a $9.15 midpoint. November futures quickly dropped to this average price, but by definition that would mean new lows ahead since it takes below and above to get average.

What do you do with this information? Do you panic as a producer? No. The first thing to remember is that there is a strong tendency for annual U.S. soybean consumption to be larger than USDA initially forecasts. If true this year, that would imply lower projected ending stocks and a higher average cash price that would eventually materialize even if the crop stays as large as advertised.

Here is an example. The August 2014 WASDE report had 2015 soybean ending stocks at 430 mb, with annual use at 3.541 bb. On Wednesday, USDA indicated that annual use for that year is projected (and almost fully realized) at 3.851 bb. That is 310 mb of extra use versus what was seen 12 months ago. Ending stocks are now seen at 240 mb, or only 56% of what they were thought to be last August.

A similar pattern can be seen in other recent years. In fact, final demand has been larger than the pre-harvest August estimate in nine of the past 12 years. Lower prices resulting from big crops tend to stimulate additional U.S. crush and export use. There is also long-term global growth in crush use that is a little more than 5% per year. We would also caution that there has been tremendous growth in South American production and shipping capacity over the past two years. Expansion of U.S. exports from the current forecast is certainly not a given.

Of course, the soybean ending stocks can also change through supply side adjustments. You will see several articles over the next week on this subject due to the various crop tours now underway. I can share that the 10-year average yield adjustment for the September crop report versus August is an increase of 0.32 bpa. There have been August-to-September yield reductions in four of the past 10 years, and two in the past five years.

In 1997, a year with a similarly strong El Nino weather pattern to this year, USDA trimmed projected soybean yield in both September and October. That is only one data point, but it is worth keeping in the back of your head. Prevented planting is another potential issue on the supply side. NASS trimmed U.S. harvested acreage for soybean by 900,000 in this report, but that was based on only three states. Any prevented planting acres or failed acres in Illinois, Indiana, Ohio or the double-crop states will not be unmasked until the Farm Services Agency reports for August and September (and likely October) have been released. NASS has typically synced up its frame samples with administrative data in October and January. As Yogi Berra is famously misquoted to have said, "The opera ain't over till the fat lady sings." She is still backstage.

Alan Brugler may be reached at alanb@bruglermktg.com

(KM/ES/AG)