Recent Crop Price Deflation – Myths and Realities
Nov 10, 2012
The grain markets price reactions on the heels of major USDA reports have become reasonably predictable. Any fresh bullish fundamental adjustment in the S&D balance sheet invariably energizes the market, but the price advance quickly subsides. Values the retrace to levels at or below where they were prior to the report. The markets response to USDA’s Nov crop reports fits reasonably well into that pattern. But the particulars of price and the fundamentals driving it have not been as uniformly bearish as such a general observation implies.
The Seven Week Stretch
If we rewind and revisit one of these recent "advance/retreat" events – the Grain Stocks report of September 28th – a more objective measure of actual price performance emerges. It is as valid a recent crop report benchmark as any to illustrate the matter. Specifically, the Sept Grain Stock report revealed a surprisingly tight physical supply of corn, triggering a $.3950 Bu rally in the Dec contract. Near ditto for wheat as tighter than expected stocks prompted a $.4450 Bu rally in the SRW Dec wheat. Even a bearish soybean stocks number, coming in above the high end of trade expectations, couldn’t dampen the animal spirits as Jan beans rallied $.29 Bu.
So, how have prices faired in the seven week period since the September Grain Stocks and the Nov crop reports? December corn has lost $.17 Bu (-2.25%), January soybeans slid $1.0825 Bu (-6.94%), and the December SRW contract is off $.1275 Bu (-1.42%). It is soy that has clearly occupied the center of the price drama/trauma since the end of September to the present. And with some form of osmosis that sectors weakness seems to have seeped into the corn and wheat markets, as well. Not as a fact of price performance, but rather as an expansion of bearish trade sentiments.
With the November USDA crop reports on the table, projecting an unsettling trend of price pressure on soybeans appears self-evident. No need to read between the lines – this is now a market that will struggle to sustain any rally of significance. Even as yields/production were posted above the high end of pre-report trade expectations, there is little sense of relief to be found in the aggressive counter-balancing seen in the demand side of the ledger. Of the 111 Mil Bu increase in production, less than 10% (10 Mil Bu) ultimately passed through to the bottom-line for 2012/13 ending stocks. With ending stocks now projected at 140 Mil Bu, they remain snug based on any historical stocks-to-usage ratio basis.
Also, what has emerged from the reports is an even greater importance for the trade to respond to that most dependable gauge of demand – weekly export sales. This past week’s (Thursday 11/8) anemic soybean export sales number was coupled with some hefty sales cancellation. Neither was in sync with the vanguard of demand. One week by no means makes a trend. However, trade expectations that additional sales will be washed off the books have been increasingly building in the trade’s collective sentiments. The soybean export sales pace is simply not sustainable; the ultimate size of the South American soybean crop will invariably pressure prices. So, along these lines, there is an ideal environment for China to throttle back on securing supply from the U.S.A. and seasonally shifting its sourcing to SA. That is THE argument presented.
The Cart in Front of the Horse
However, there are a couple of very large unknowns clustered in what is essentially a very presumptive narrative. First, the SA crop still has several months to be "made" and at what is still an early stage in the crop calendar some weather related concerns have emerged. Secondly, the extent in which China is comfortable with its current forward coverage is unknown. History, in this latter regard, is heavily weighted on the side of the trade underestimating, rather than overestimating, Chinese demand. Going forward, the on again-off again influence of Mother Natures impact on SA soy (and corn) production, as well as the export sales pace will serve as the animating feature of soybean price behavior.
Setting aside the fundamentals for a moment, the technical damage to charts is considerable. One of the most relatively recent remaining "breakaway" gaps in 2012/13 marketing year contracts was filled in the post-report price dive. It is as a large dent in any price supportive technical picture. It will now require a Herculean effort for the January contract to advance above, let alone sustain, the $15.25 Bu level. In this environment, producers holding unpriced production need to reward rallies by advancing sales.
Kernels of Truth about Corn
The corn market is not nearly as fundamentally under siege as its post-crop report price reaction would suggest. Taken into consideration the extreme pressure placed on soy values and to only a lesser extent wheat as well, the corn market has exhibited considerable resiliency. Yes, export sales still loom large as an Achilles Heel of demand. Corn grind for ethanol is likewise a demand soft spot. Yet, both areas hold the potential for improved performance over time. But, trade impatience for the export pace to improve from its moribund pace will progressively wear thinner in the absence of evidence that some foreign end-user demand has been uncovered.
Noteworthy, is that USDA kept both demand line items unchanged from October’s WASDE. Corn grind for ethanol in the 2012/13 marketing year remains at 4.150 Bil Bu and export sales projections stand at 1.150 Bil Bu. An increase in imports of 25 Mil Bu (perhaps 10 ships afloat from S.A.) to 100 Mil Bu is noted. But the absolute level of US corn imports in the 2012/13 crop marketing year will not make or break the overall S&D configuration and is incorporated into values.
The area that is not being posted on any bear marquee is the beef, pork, poultry, and egg production projections in the Nov WASDE. The once widespread and palpable concern that a massive wholesale reduction in breeding herds and poultry sector was forthcoming has not evolved to meet those grave expectations. Yes, fewer cattle-on-feed, but a precipitous decline in pork production does not appear in the offing. Nor does either broiler or egg production appear to be stabilizing, if not actually looking to marginally expand. If there is a caveat here it is that poultry/egg production is accomplished with exponentially greater feed efficiency. Yet, it is an area where price does not appear to have rationed demand.
As with soybeans, the trade might be leaning a bit too far on its skis on SA corn production prospects. At this juncture SA corn production prospects may appear less than ideal, but ample time remains for improvement. Irrespective, the trades’ intense focus on SA production, it is something that is going to persist for some time. And it along with it - the subtle influence in the price discovery process. However, the primal factor is that USDA’s nominal increase in the U.S. yield/production projections in the Nov Crop Production report underscores US supply is tight as a drum. World corn supplies are similarly taut.
With follow through selling in soybeans and wheat, corn is set-up for a tussle to hold support in the $7.30 Bu area basis Dec futures. Barring a categorical unraveling in global macro-economic markets, fundamentals continue to suggest that any price weakness will discover end-user demand. So, while a corn price debacle does not appear in the offing, producers with unpriced production need to remain vigilant in tracking local basis levels, targeting upside price objectives, all the while retaining a defensive posture with either futures or options.