Ø On the eve of two major crops set for release at 7:30 a.m. CDT Friday March 31st, the trade’s anticipation is at a fever pitch. It all boils down to the extent in which USDA’s Prospective Plantings or Grain Stocks numbers vary with trade expectations. That is will determine the magnitude and direction of the price response.
Ø Following, some historical perspectives that provide pre-report insights. And can be referenced to see where the reports fit into the historical record. That will provide longer-term insight into future market behavior. For our purposes, the focus is on the principal row crops – corn and soybeans.
Ø Near and long-term history suggests low odds for the reports to be fall into the neutral category. Even if USDA’s numbers fairly well line-up with current trade estimates the market will nevertheless have a vigorous price response.
Ø Though the post-report price response will be swift and decisive – it will have run its course within a handful of trading sessions. This observation applies specifically to the new crop contracts – December 2012 Corn and November 2012 Soybeans. Producers and end-users should expect the market to digest the USDA numbers and re-calibrate price levels accordingly. In short order, the market will then pivot its full attention to weather, crop progress, and how current crop marketing year demand prospects evolve going forward.
Ø No one has foreknowledge of the numbers USDA has assembled - other than the under “lock and key” of the sanctum sanctorum of USDA itself. Yet, with history as a guide, the markets post-crop report response is reasonably consistent. It hinges on trade expectations versus official USDA numbers.
Ø Tendencies exist for the trade to over or underestimate key USDA numbers. On occasion the trades over/under estimation of USDA numbers can be extreme – amplifying the price response.
1) USDA’s March 1st Quarterly Corn Stocks represents usage for the 2nd quarter of the 2011/12 crop marketing year that began September 1, 2011.
2) In the past 27 years there have been 15 years (56%) in which the trade has underestimated March 1st corn stocks. In two of those 15 years (13%) the USDA number came in ABOVE the high end of trade expectations.
3) In the 12 years in which the trade overestimated March 1st corn stocks; there were 6 years (50%) in which USDA’s numbers came in BELOW the low end of the trades expected range.
4) So, on balance the occurrence of trade over/under estimation March 1st corn stocks is negligible, but when underestimation occurs the pattern suggests a greater likelihood that it will be extreme.
5) USDA most recent (December 1, 2011) quarterly corn stock level was 9.642 billion Bu. Last year, March 1, 2011 corn stocks were 6.523 billion Bu. Pre-report trade estimates for corn stocks for March 1, 2012 are in an approximate range of 5.925-6.300 with an average estimate of 6.151 billion Bu. (Source: Dow Jones)
6) Important background: USDA’s implied usage of corn for the 1st quarter (released on January 12, 2012) was significantly below trade expectations. It roiled the corn market with old crop March, May, and July 2012 contracts rapidly trading and closing "locked-limit" down(-40 cents). The price response occurred despite the fact that corn stocks as of December 1, 2011 were 425 mb below than prior year levels AND the smallest in 5 years. However, the 9.642 billion bushel stock level was 240 mb over trade expectations
7) Moreover, the intrigue (and skepticism) which surrounds the upcoming Grain Stocks report has a legacy extending back to the final Grain Stock report for the 2010/11 marketing year. Covering the final quarter (June-August 2011) period it revealed unusually low usage. Hence physical supply larger than trade expectations. The corn market responded with a five week price decline of $1.80 Bu from the pre-report price of $7.57. While trading the numbers as presented, there was nevertheless skepticism on the low usage and hence larger supply of corn. The number was accepted and traded, but regarded as an anomaly of sorts. The belief took hold that usage would be revised upward and incorporated into the next Grain Stocks report (Sept-Nov 2011) Quarter.
8) As previously cited, the 1st Quarter Corn Grain Stock report released on January 12th did not provide any soothing balm for corn bulls. So, the "story" for the Grain Stock report on March 31st is whether USDA will finally adjust use higher. If that is going to happen, the March 31st report represents the last opportunity to do so. Keep in mind that the "usage" wildcard is implied in the "Feed and Residual" category on the demand side of the ledger. All other demand line items are transparent – they are known. Feed/Residual is the 2nd largest demand component, exceeded only by corn grind for ethanol.
9) A pronounced longer-term trend has developed for 2nd Quarter corn use or “disappearance”. It is tending to track below that of the 1st Quarter. If that trend persists in the upcoming report - by no means a certainty - it may introduce a price negative “surprise” for old crop corn.
1) Over the past 27 years, the trades over/under estimation of soybean stocks have been pronounced – in 19 (70%) of the years the trade has overestimated USDA’s March 1st soybean stock levels. In 6 of those years (22%) USDA’s soybean stock levels have come in under the low end of trade expectations.
2) Of the 8 years that the trade has underestimated March 1st soybean stock levels; 3 years (38%) have been above the high end of the trade’s expected range.
3) So, there is a clear bias for the trade to overestimate soybean stock levels with an approximate 1 in 3 chance (32%) that USDA’s stocks number will come in below the low end of trade expectations.
4) USDA most recent (December 1, 2011) quarterly soybean stock level was 2.366 billion Bu. Last year, March 1, 2011 soybean stocks were 1.249 billion Bu. Pre-report trade estimates for soybean stocks for March 1, 2012 are in an approximate range of 1.228-1.467 with an average estimate of 1.361 billion Bu. (Source: Dow Jones)
Prospective Plantings (aka Planting Intentions):
1) From a historical standpoint, the trade has a pronounced bias to overestimate USDA’s official, survey based, March corn planting intentions. The trade has overestimated USDA’s official number in 16 of the past 27 years (59%). It has underestimated planting intentions in 11 years. Moreover, of the 16 occasions where trade overestimation, there have been 6 times (46%)that USDA’s planting intentions numbers have fallen BELOW the low range of expectations. So, not only is there a decent overall statistical bias to overestimate intended corn seedings, there is a better than 1 in 3 chance (38%) that the variance will be a “whopper” of a surprise.
2) Of the 11 years that trade underestimation of intended corn seedings has occurred, there has been only 1 occasion (1986) in which it has been above trade expectations. Given the high confidence level the trade has attached to its corn seeding estimates for the Prospective Plantings reports, history suggests that the potential for a bullish surprise has been sown.
3) Where is the corn acreage going to come from? Since, the trade consensus is for record acreage, I look first to historical evidence as a guide. If the US is to plant the most acres to corn since WWII, then look to what has occurred since the 2nd largest acreage was sown – 2007. That is the benchmark year. Looking at shifts in seeded acreage (Final) in both the Eastern Corn Belt (ECB) and Western Corn Belt (WCB) - it’s evident that one area having promise of increased corn acreage in 2012 is the ECB. The graphic below illustrates the potential.
Shifts in Corn Acreage between 2007 and 2011
4) The second potential for acreage increase comes from those states that registered prevented plantings of corn in 2011. There were 3 million acres Corn prevented plant acres totaled 3 million acres. Of that, approximately 50% occurred in North and South Dakota. So, look to the ECB and the Dakotas to take the lead in corn acreage expansion in 2012.
5) Trade estimates for corn in the Prospective Plantings report have coalesced in the range of 94-96 million acres, with a 95 million acre average. This compares to 91.921 million acres planted to corn in 2011.
1) Soybean acreage that will be posted in the Prospective Plantings report is a “hot button” issue. Because of the shortfall in SA production and China’s near insatiable appetite for soybeans, the necessity to expand soy acreage is acute.
2) Historically, trade estimates for soybean seedings on the March Prospective Plantings report have not only exhibited variance with USDA’s numbers, but have a high incidence of being above/below the range of trade expectations. And that is on both ends of the spectrum. The over/under ratio is reasonably distributed. In the past 28 years, the trade has underestimated Soybean acreage on 16 occasions (57%) and overestimated 12 times (43%).
3) The trade’s pre-report estimates have fallen out-of-range with USDA 50% of the time. In the 12 years that underestimations occurred, 6 (50%) USDA came in with numbers above the high end of the pre-report range. Overestimations fell outside of the low end of the range on 8 of 16 years (50%). Compared to variance in trade expectations vs. USDA numbers in the Prospective Plantings report, it is soybeans that hold an equal potential for introducing a greater bullish or bearish shock to the trade.
4) Trade estimates for soybeans in the Prospective Plantings report have coalesced roughly in a range of 74.5 – 76.5 million acres, with an average estimate of 75.5 million acres. This compares to 74.976 million acres planted to soybeans in 2011.
5) The net shift in soybean acreage from 2007 and 2011 is illustrated in the graphic below:
Shifts in Soybean Acreage between 2007 and 2011
Ø We’re on the eve of a critical “reset” event for the market.
Ø Initially, the market’s price reaction will be upfront, visible, and telegraphed to the world. However, in tandem with the report’s release a less conspicuous and intangible component will be “put into play” with the reports. And it will remain in place for the foreseeable future. That’s worth noting now.
Ø While a quick post-crop report recalibration of values might be in the overall price discovery process, there is an equally crucial, yet difficult to quantify element that’s going to be injected into the scenario. And that is the fundamental shift in trade sentiment a.k.a. “price bias” that will occur whether USDA’s numbers are bullish, bearish, or neutral. However, it will endure, linger if you will, well into the growing season. And it will be at work to restrain the magnitude of both price rallies and declines.
Ø Trade price bias is a longer-term psychological component and as such a challenge to quantify. Yet, it ultimately will come to the fore via the markets price sensitivity - primarily to weather conditions in the 2012 growing season. Unanticipated persistence and robustness in export demand as we enter the 2nd half of the 2010/11 crop marketing year may also provide a platform to enhance or the trade’s collective price bias.
Ø The emergence of a difference trade price bias or the possibility of existing sentiments to be further amplified by the extent in which USDA’s numbers vary with trade estimates are both on the table.
Ø The anticipated strength in soybeans, as a consequence of extreme shortfalls in South American soy production, coupled with strength in world vegoil markets will provide underlying support to both old and new crop soybean contracts. That dynamic may exert a positive influence on corn price, as well.
Bottom-line Marketing and End-User Advice:
It will take 5 days following Friday’s crop reports for new crop Corn and Soybean contracts to find equilibrium. Look for the soybean market to continue to be the price leader. Producers need to refrain from selling into a bearish knee-jerk response. Corn values, both old & new crop will be underpinned by demand and production uncertainty going forward. End-users will need to be nimble to cover bear-term needs on any negative price response following the reports.