Going into Wednesday’s USDA April WASDE report the trade was laser focused on two line items – US corn and soybean ending stock levels. Specifically, just how USDA was going to handle the "residual" issue which arose over the utterly unexpectedly large physical supply of corn and soybeans found in the March Grain Stocks report. Trade interest in the mechanics of tinkering with other line items on either the supply or demand side of the balance sheets was secondary to the impact on the residual issue. Just about every other aspect that is contained in that report was expected to be "side-dressing". We now know otherwise.
However, the report has proven to be a fundamental game changer going forward. The increases in world corn, soybean and wheat end stocks have altered the supply-side landscape. And to an extent is functioning to near-term overshadow US 2013 production prospects in each of those commodities. The price impact of Wednesday’s April USDA WASDE crop report has been relatively benign, thus far.
It was the sheer magnitude of the trade’s underestimation of the US Grain Stocks numbers that likely contributed to a rush to the other side of the boat, i.e., end stock levels were now going to have to be driven up substantially to accommodate this fresh mother lode of physical supply. So, some gaping statistical space was created between the trades’ pre-report estimates and the actual numbers USDA presented in the April WASDE. It was like the March Grain Stocks report - deja-vu all over again.
The variance between pre-report trade estimates on US corn & soy end stock numbers would have been handful to deal with in and of themselves. However, throw in a cluster of lightning bolts in some world S&D forecasts and the variance between expectations and actual numbers was seen across the board. The cumulative impact is rather far-reaching and does not project a longer-term price constructive scenario.
The table below details the major variances:
CORN: As cited earlier, old-crop corn stocks did not as large as the expected. The rather modest post-crop report rally seen in old-crop contracts is in part "relief" as the trade was braced for a more substantial increase in end stocks. The focus on USDA’s handling of the "Feed & Residual" component was the driving factor. The 150 Mil Bu decrease from March in the feed/resid category to 4,400 Mil Bu appears modest. However, we think it’s a well-considered approach in light of larger hog numbers that were seen in the Quarterly Hogs & Pigs report, as well as uptrending broiler egg sets and finished weights. Hog weights have picked up recently, too.
Actual and anticipated increases in feed offtake into the foreseeable future were the drivers functioning to restrain an even larger expected larger jump in carry-out. Consider the fact the dramatic price breaks experienced in old-crop corn contracts since March 28th. July corn broke an even $1 Bu from $7.15 Bu to a low of $6.15 Bu. And it traded at $6.17 Bu within 12 minutes of the release of the April WASDE. Despite a lower than expected end stocks number, old crop corn will limited in its ability to sustain rallies of significance.
A thin silver lining in the demand picture also appears in corn grind for ethanol as USDA raised its forecast by 50 Mil Bu to 1,4550 Mil. Although the ethanol production pace at the at the moment appears to be lagging the forecast, increased processing margins for ethanol producers on the heels of dramatically lower corn values will stimulate ramped up production. The most recent ethanol production figures, for the week ending April 5th, jumped nearly 6% week over week. We look for this trend to continue as the US is entering a seasonally strong period for gasoline consumption which will be supportive to increased blending rates.
Positive upward demand adjustments also appeared in the Food, Seed, and Industrial use category, as well. On the bearish demand side, an already lagged pace in exports has crossed the timeframe threshold where they can be reasonable expected to play "catch-up". Particularly, market share competition for foreign end-users from South America will crimp future prospects. Corn exports were lowered by 25 Mil Bu to 800 Mil Bu – a multi-decade low – and are essentially dropped off the radar as a candidate to be increased for the current marketing year.
The once pressing need to ration corn demand has passed. For the moment, old-crop S&D has achieved equilibrium and the launching of any significant rallies are unlikely, at best. Further erosion in new crop prices is being held in check by the lagged start to corn seeding. There is an unquantifiable trade-off here between the benefits of recharging soil moisture in the WCB and the potential for yield drag if the crop isn’t seeded in a timely manner.
Any opening in the planting window will also be accompanied by pressure on new crop corn prices. While this 2013 growing season is clearly not anywhere similar to 2012, the trade will be mindful of the rapidity in which the corn crop can be seeded. The table below illustrates the 2012 "ideal" seeding pace. (Note: The weekly USDA/NASS Crop Progress report on planting pace reflects acreage as reported in the March Prospective Plantings report. So, in 2012 it is working with initial planting intentions of 95,864 Mil acres. Final planted acreage ultimately increased 1,291 Mil acres to 97,155 Mil Acres. )
While 2013 is past the point that will allow for the rapidity of getting the corn crop seeded overriding theme here is how quickly producers can get the corn crop into the ground when conditions allow. Most notable is the three weekly periods between 4/29/12 and 5/13/12. While roughly one-fourth (26%) of the crop was planted on 4/22/12, during the next 7 day period producers planted 25.883 Mil acres. In other words, in a single week more corn was put in the ground then the prior four weeks combined. That weekly spike was followed by a rapid pace during the next two weeks. In a three week period, a total of 58.477 Mil acres were planted which represented 64% of the entire crop. The pace in which the US corn crop can get planted when a real planting window opens is not going to be lost on the market.
A "rule of thumb" is that roughly 80% of the corn crop should be seeded by mid-May; otherwise there is a yield drag correlation. We would advance the idea that there a considerable number of weather variables that can function to mitigate a later seeded crop. Ultimately, the vagaries of weather are the hinges on which yield swings. After all, the 2012 planting pace trajectory would have the 80% mark hit on May, 10th. And we all know what happened last year to toss that "rule of thumb" right straight out the window.
SOYBEANS: With 2012/13 soybean end stock levels unchanged at 125 Mil Bu the current S&D disequilibrium remains intact. Upward revisions in forecasted exports for soybeans – up 5 Mil Bu to 1,350 Mil Bu, soymeal – up 450k short tons to 9,350k, and soyoil – up 200K/lbs. to 13.200 Mil lbs. is uniformly supportive. Likewise, soybean offtake is increased with crush raised 20 Mil Bu to 1,635 Mil Bu. Soybean imports left unchanged at 20 Mil Bu.
The issue of how USDA would finesse the larger than expected physical soybean supply from the March Grain Stocks report was addressed in straightforward enough fashion. Residual was lowered 20 Mil Bu to 5 Mil Bu. There is an assortment of reasons for lowering the residual. For the time being, the trade will simply accept the number. We have to wait until the next Grain Stocks report on June 28 to see what, if any, reconciliation of the numbers occurs.
The resilience of the export/shipment pace to date coupled with a lagged start to the SA exports are the driving factors. Noted is that USDA lowered Argentine and Brazilian forecasted exports of soybeans, soymeal, and soyoil for the current 2012/13 marketing year - that runs from October 2012 through September 2013. Today’s weekly soybean export sales report covering the period ending April 4th revealed old-crop sales of 319,220 MT’s. That brings net o/c sales to 1,335 Mil Bu or 98.8% of USDA’s most recent upwardly revised target of 1,350 Mil Bu. Net old-crop soymeal sales came in at 227,100 MT’s that’s 96% of the USDA’s upwardly revised forecast.
Now, despite the upward revisions in demand forecasts, coupled with an essentially static supply further begs the question of how the US is going to make it through the 21 weeks remaining in the marketing year without a demand rationing rally? The resolution has to come from an unprecedented scaling back in demand across all categories AND at some point increased imports. We have been of the opinion that this soy S&D disequilibrium will ultimately be resolves without a dramatic demand rationing price rally. We continue to retain that assessment. NOPA will release their March crush report this coming Monday, April 15th. It will provide the next keen fundamental insight into the demand trajectory.
The cumulative impact of the April WASDE is rather far-reaching. However, it does not contribute to a longer-term price constructive scenario. While the positive domestic demand revisions cannot be ignored, overall the large increases in world corn, soybean, and wheat end stocks will serve to limit price advances. Increased SA corn and soybean production estimates will similarly exert a drag on significant price rallies going forward.
Persistently strong basis levels in corn and soybeans reflect the reality of tight supplies. Expect basis levels to firm as cash movement slows when producers become fully engaged in field work/planting. Producers holding old-crop corn/soy need to keep daily track of their local basis as attractive marketing opportunities will develop. Both old-crop and prospective new crop corn contracts will have limited upside potential.