This week marks the official start of the new crop supply and demand season with the release of the USDA’s outlook this Friday. There will be a lot of talk about the numbers ahead of the report, what traders are expecting and how it will be bearish. There will then be a lot of talk after the report on the nuances of the numbers and what they mean--when they actually mean very little outside of acting as a starting point for the year ahead.
Don’t get me wrong, I am not saying the USDA numbers are meaningless, that is not the case at all. However, in this instance, there are a couple important factors I feel farmers and analysts tend to miss. First, the market has been trading these numbers for months and secondly, the numbers we get on Friday are almost guaranteed to change, possibly in a major way in the year ahead.
Drilling down a bit further into my points, when I say we have been trading this for months, I mean we’ve had an idea of what planted acres would look like from a purely economic standpoint since last November. The USDA has made some adjustments to their outlook since, once at the February outlook forum and again after the planted acreage number was released at the end of March but for the most part the numbers have not significantly swung one way or another.
Traders have been building spreadsheets on potential outlooks for months now, taking those planted acreage figures from March and using the trendline yield figure the USDA has put together to get a feel for production. That production figure is added to the updated old crop carryout to give us an outlook on the total supply for the year. The overall supply is then butted up to demand to get an idea on what new crop ending stocks will look like.
Some will say the demand outlook is the wildcard ahead of this report, but I feel like the demand outlook for the year ahead has been well telegraphed by the USDA in their outlook forum figures. This early in the year the USDA tends to lean more conservatively, not moving far from their earlier thoughts without some type of catalyst that forces them to do so, like a major shift in production or a trade issue.
Taking those figures at face value with an update to old crop carryout after the April WASDE, gives us a 335 million bushel or so carryout for soybeans and a 2.39 billion bushel carryout on corn—neither one is very bullish when looking at historical price trends, but like I said, traders have known this was coming for months now.
Which takes me to my second point, these figures are going to change, and the emotions involved when they do change are likely to be big. Looking over the historical accuracy of the May WASDE, we find that over the last 42 years, the USDA has been above the final ending stock figure for corn in their May estimate 23 times, coming in below their May estimate 19 times. The average miss over the years from start to finish for corn is around 600 million bushels.
In soybeans, the May ending stocks estimate from the USDA has been above the final figure 28 times and below 14. The average miss for beans is just under 130 million bushels.
From actual acreage to weather and then all the factors at play that influence demand, it is no wonder we tend to see big market moves from the start of the year to its completion. So, while Friday’s report is a great place to officially start, it is by no means an accurate indicator of where we will end.
Other things I am watching this week:
South American production losses will prove hard to quantify, not only are we dealing with issues in Southern Brazil, but Argentina also seems to be struggling as the crop heads to the finish line. The cash market will continue to be the best indicator of availability in the physical pipeline and how that matches up with demand.
In addition to weather issues, Argentina will continue to see rolling strikes as the unions there protest recent proposals and the passing of a bill that would lower the income tax threshold for many workers across the country. While none of the disruptions so far have been long lasting, if prices and quality are relatively close, buyers will choose the supplier able to ship with the most ease to ensure on time delivery.
Weather in other parts of the world, including the United States is proving problematic as well, bringing new longs into the market and possibly pushing speculators to start covering their shorts. I will look at what’s happening and what it could mean for the world cash markets as we head into the summer later in the week.
In the meantime, please don’t hesitate to reach out with any questions! Have a great week.
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
