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February 2012 Archive for From the Editor

RSS By: Brian Grete, Pro Farmer

Pro Farmer Editor Brian Grete takes time to talk with Pro Farmer Members about some of the key issues in each week's Pro Farmer newsletter.

A thin supply-side cushion for 2012

Feb 28, 2012

Chip Flory

From The Editor

Feb. 24, 2011

Hello Pro Farmer Members!

For only having four market days in it, this week was jam-packed with all kinds of market-moving happenings. Unfortunately, it seems like USDA's annual Outlook Forum overshadowed many of these happenings. We try to bring some perspective to those factors in this week's newsletter.

Some of the most interesting comments in the letter this week (in my opinion) came from Sr. Market Analyst Brian Grete in his fundamental corn comments on Analysis page 2. Here are his comments:

USDA confirmed what traders expected with its initial 2012-13 projections last week — potential for a record crop and a sharp rise in carryover. While the projections weren’t a surprise, they still weighed on futures, with new-crop contracts leading the decline. But the widening of bull spreads even as prices slip is a bullish indicator. The tight old-crop supply situation isn’t going to be "cured" until next fall at the earliest — even if the U.S. grows a record corn crop. And end-users know that. The drop in prices now will encourage end-users to ramp up purchases of corn, which in turn will further tighten old-crop supplies this summer. The result is an increased likelihood of greater price volatility, especially if there’s a weather scare, as the market tries to balance tight old-crop supplies against the potential for a record crop.

"...especially if there's a weather scare..."

There's a good reason to include that comment. Old-crop carryover is, very simply, the supply-side cushion for any problems with the new-crop production. The 2009-10 marketing year started with a cushion of 1.7 billion bu. and 2010 production problems helped support the market. The 2010-11 marketing year started with 1.128 billion bu. and the market made a new all-time high in the summer of 2011 as hot temps during pollination and kernel fill cut into yields.

Right now, the 2012-13 marketing year is expected to start with an 800-million-bu. cushion. That's next to "nothing." It takes at least that much corn to keep corn flowing through the pipeline. I'm not predicting an assault on resistance at $8 for old-crop futures this summer, but the thin cushion on 2012-13 supplies will certainly make the market vulnerable to another rally if any production problems arise.

That's it for this week...

Take a look at Crop Tour newsletter

Feb 17, 2012

Chip Flory

From The Editor

Feb. 17, 2011

Hello Pro Farmer Members!

I'll admit, I'm hustling to exit the premises right now! I'm headed out the door to head to the Iowa Beef Expo in Des Moines where my son Tom is showing his 4-H project in the junior steer show on Sunday morning. I haven't had a steer at the fairgrounds in Des Moines since 1983, so I'm just a bit excited about getting on site for some cattle-barn fun!

We produced another issue of the Crop Tour newsletter this week. It's jam-packed of perspective on global crop situations and includes the long-term outlook for U.S. weather. Be sure to read the February issue of Crop Tour newsletter... it might help explain why China is buying beans -- and is rumored to have bought a big chunk of wheat (origin unknown) this week!

February issue of Crop Tour newsletter

That's it for this week...

Pro Farmer calls for USDA Reviews

Feb 15, 2012

Chip Flory

From The Editor

Feb. 10, 2011

Hello Pro Farmer Members!

It was a difficult newsletter to write this week. After spending last week at the 2012 Top Producer Seminar where I moderated a panel discussion on the volatility created by recent USDA reports, farmer's frustration about the reports has been an often-discussed topic here at Pro Farmer. We asked some Pro Farmer Members and some long-time market- and USDA-watchers for input and consensus was clear: USDA needs to do an internal review of its processes used to provide the critical information the markets require to accurately execute the duty of price discovery.

As you will see on News page 4 of this week's letter, we are not questioning the accuracy or USDA's effort. We are, however, very concerned that too many farmers have lost faith in USDA's estimates. If the review is conducted in a transparent way, our hope is the market's faith would be restored in its estimates.

In an effort to explain our call for USDA to review its processes, here's the content from this week's News page 4.

Are USDA estimates still relevant?

Yes. Without doubt, USDA’s supply estimates for crops and livestock grown in the U.S. and around the world are relevant. But the simple fact some farmers question the relevancy of USDA’s estimates speaks volumes of how frustrated they’ve become with the "surprise component" of recent reports. One or two surprises... okay. But USDA’s combination of the National Ag Statistics Service (NASS) and World Ag Outlook Board (WAOB) have been pinning the tail on the donkey at this surprise party since June of 2010. That’s too long for many farmers who are losing faith in the numbers.

Data versus a very educated ‘guess’ —

NASS conducts supply-side surveys for USDA: Crop Production; Quarterly Grain Stocks; Cattle Inventory; Cattle on Feed; Quarterly Hogs & Pigs Reports. Those are the headline examples of the surveys NASS conducts.

None of the survey work NASS does is easy and there is a strict process of data gathering and data checks in place that turn out the best set of supply-side data of any country in the world. Without doubt, data from NASS is far more reliable than production estimates from the governments of China, Brazil, Argentina or any other country. But having a high level of reliability does not imply complete accuracy. Nor should 100% accuracy be expected. What we should expect is the highest level of accuracy possible.

WAOB "takes" the NASS supply-side estimates and balances the supply against demand estimates. Yes... these are "guesses" of how much will be used, but it is a very educated guess made by highly experienced and "just plain smart" people.
The overlap of some data is why we refer to supply or Supply & Demand Reports as "USDA Reports," rather than specifying NASS or WAOB.

Understand the origin of ‘surprises’ —

NASS has taken many shots for its Quarterly Grain Stocks Reports. In many reports, starting in June 2010, NASS has delivered grain stocks well above or below trade expectations. In June 2010, NASS numbers indicated March-May 2010 corn use was about 300 million bu. bigger than trade expectations, resulting in June 1, 2010, corn stocks that were 300 million bu. below the average pre-report trade expectations.

It’s how those numbers compare to trade expectations that create the surprise.
Based on June 1 corn stocks and the indicated usage pace, WAOB on Sept. 10, 2010, estimated 2009-10 corn carryover at 1.386 billion bu., setting traders’ expectations for Sept. 1, corn stocks. Instead, NASS on Sept. 30, estimated Sept. 1 corn stocks at 1.7 billion bushels. (It appeared USDA had "found" the bushels that were "lost" in June.)

A similar scenario played out in September 2011. USDA’s NASS indicated Sept. 1, 2011, corn stocks of 1.128 billion bushels. Just days earlier, WAOB had estimated 2010-11 corn carryover of 920 million bushels.

While Sept. 1 corn stocks (from NASS) have been above pre-report trade expectations the past two years, those trade expectations were based largely on carryover estimates (from WAOB) delivered just days earlier.

To be fair, the WAOB carryover estimates are based on stocks estimates and indicated usage trends from NASS delivered earlier in the marketing year.

Yeah... it’s kind of a circle with what appears to be conflicting data flowing from "USDA."

USDA data is a benchmark —

Benchmark data is the data set to which all other data is compared. Simply put... USDA is right because it’s right. It is the best set of data available.

We run the Midwest Crop Tour and gather a large amount of data on corn and soybean yield potential. At the end of the Tour, your editors take that data and use it to estimate national average corn and soybean yields and to estimate crop size. With some notable exceptions, we’ve done a good job of estimating yields and crops. How do we know that? Because we compare our estimates made in August to the final yield estimate delivered by NASS in the January Annual Production Summary. How do we know there are "notable exceptions?" Because we compare it to USDA’s crop estimate. That makes USDA the best crop estimate in the business — the benchmark estimate.

That does not, however, mean we’ll stop doing the Crop Tour and making yield and crop estimates. We’ll also continue to estimate use and explain how we see the marketing year playing out differently than does USDA in the Supply & Demand tables. And we will advise risk-management strategies based on our expectations in anticipation that USDA estimates will (eventually) match up with our expectations.

If our assumptions are wrong, we’ll adjust marketing strategies to account for those differences.

But now is the time for a review —

Regardless of track records, it’s good to internally review processes from time to time to make sure "old, consistent" formats still apply in today’s world. We did that a few years ago for Crop Tour, resulting in an adjustment to the corn yield calculation.

With farmer, industry and commodity groups’ frustration about USDA’s reports, it’s time for a review. A review does not assume the data is wrong or USDA has delivered "bogus" numbers. Years ago, NASS reviewed soybean stocks data and improved the system. It’s time again for a review to see how the system might be improved.

That's it for this week...

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