USDA Reports Review

What Mattered Most

USDA left its national average yield estimates for corn and soybeans unchanged from June in its July Crop Production report on Wednesday. (DTN file photo by Pamela Smith)

Maybe it was how USDA left its national average yield for corn and soybeans unchanged from June. Or maybe it was the near-across-the-board increases in global ending stocks (the outlier being new-crop world wheat). Or possibly it was how USDA's initial production estimate for hard red spring wheat came in above expectations. Or maybe because domestic corn ending stocks were increased while domestic soybean ending stocks stayed cumbersome (despite decreases). Or it could've been, simply, rains had showed up not only on weather maps but in forecasts for next week as well.

Whatever the reason, grain and oilseed markets took it on the chin both before and after the release of USDA's July Supply and Demand and Crop Production reports Wednesday.

Following the June 30 Quarterly Stocks report, the third-quarter number for corn, DTN estimated total 2016-2017 demand at 14.553 billion bushels. This was slightly below USDA's then-projected (June Supply and Demand report) total demand figure of 14.645 bb. DTN's ending stocks figure was 2.387 bb with the ending stocks-to-use (es/u) ratio calculated at 16.4%. Meanwhile, USDA's estimates were 2.295 bb and 15.7% respectively. Therefore, for those following along on their DTN, the fact USDA increased its old-crop ending stocks figure to 2.370 bb by decreasing demand to 14.570 bb (a 75 mb decrease in feed demand) and resulting in es/u of 16.3% should have come as no surprise. Yet the old-crop September futures contract was down 16 1/4 cents at Wednesday's close, with the DTN National Corn Index (NCI.X, national average cash price) expected to show a similar decrease (at least) when calculated Wednesday evening.

Perhaps the sell-off is due to an idea DTN has been talking about, dating back to last December's annual DTN/The Progressive Farmer Ag Summit in Chicago. That is, given old-crop corn's es/u, cash corn (the market's intrinsic value) looks to be overpriced. Using a scatter chart and trendline dating back to the 2006-2007 marketing year, with a 16.3% es/u (USDA figure), cash corn should AVERAGE roughly $2.60 with a possible range (for the average) of $3.05 to $2.35.

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The biggest question regarding USDA's July Supply and Demand table is corn export demand holding at 2.225 bb despite a pace suggested by USDA's own weekly Export Sales and Shipments reports of closer to 2.362 bb. Something will have to give by the time the Sept. 30 Quarterly Stocks report (stocks on hand as of Sept. 1) rolls around. Given the earlier discussion of June 1 stocks, it looks like that something will be the pace of exports slowing down considerably.

USDA guessed old-crop domestic soybean ending stocks to come in at 410 mb, down 40 mb from its June estimate based on a 10 mb decrease in crush demand offset by a 50 mb increase in exports. This put USDA closer to the 402 mb calculated by DTN following the June 30 Quarterly Stocks report. So, if old-crop ending stocks are expected to be lower than previously estimated, why did the market go lower?

The bottom line is the ending stocks estimate of 410 mb is still a large number, and its resulting es/u of 10% is still double what was calculated at the end of the 2015-2016 marketing year. If USDA's seasonal pattern of its Sept. 30 quarterly stocks figure (de facto ending stocks number) coming in 63% below the highest estimate over the previous 15 months, monthly decreases will need to be more than 40 mb. If USDA's seasonal pattern is to hold true, and given its high ending stocks estimate of 480 mb (December 2016), domestic soybeans have a long way to go to get to the projected 171 mb. At this point, given export and crush demand, such a decrease seems unlikely. That leaves only a dramatic revision of old-crop supplies as a possibility.

Those looking for changes in new-crop yield and production estimates were probably a month ahead of schedule. USDA's July report is the last one before the survey-based reports begin in August, meaning adjustments to production are usually a result of changed planted acreage estimates from the June 30 report. Using that, DTN projected corn production at 14.201 bb and soybeans at 4.253 bb. In its July Crop Production report, USDA showed guesses of 14.255 bb and 4.260 bb, as compared to average pre-report estimates of 14.074 bb and 4.241 bb respectively. Again, in that light, the sell-off by new-crop December corn (15 1/2 cents) and November soybeans (9 1/4 cents) futures was less shocking.

Lastly, new-crop September Minneapolis hard red spring wheat closed 14 cents lower after USDA released an initial production estimate of 423 mb. Initial reactions claimed the pressure was tied to coming in above the average pre-report estimate of 414 mb. The reality is this number is likely far from correct, and certainly not the last guess regarding spring wheat production. The problem is it was the first, meaning there was nothing for traders to compare it to. That won't be the story in August.

The July reports are now out of the way, and another weather-market weekend is fast approaching. Don't be surprised to see, if it hasn't already happened, attention quickly return to weather maps and forecasts.

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

Follow Darin Newsom on Twitter @DarinNewsom

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