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 28^th. 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 5^th, 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, 10^th. 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 4^th 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 15^th. It will provide the next keen fundamental insight into the demand trajectory.  

SUMMARY:

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.

The CME Group will host a pre-crop report briefing today at 2:30 pm CT on which I will be a panelist. Media and market participants are welcome to join in the briefing via a live webcast. A short Q & A session will be included. The briefing via webcast can be accessed at:

http://www.cmegroup.com/cropreports

Following USDA’s release of the Grain Stocks report on March 28th trade expectations are for end stocks for corn, soybeans, and wheat to be increased for the 2012/13 marketing year. Revisions in Argentine and Brazilian soybean and corn production are also anticipated.

Additionally, the Prospective Plantings report of March 28th provided the trade with a baseline in which to construct production scenarios for corn, soybeans, and wheat.

• What potential price reaction can be expected if U.S. and global stocks/production numbers do not vary substantially from trade expectations? And what if below — or — if above trade expectations?

• At what point does the market discount known old crop fundamentals?

• Price implications of increased beginning stock levels on the 2013/14 crop marketing year?

• Can dynamic soybean sales & shipment pace be sustained as availability of record South American supplies to end-users quickly ramp-up?

• The old-crop soy complex — soybeans, soymeal, and soyoil — are residing at critical long-term price support levels. Can these levels hold and a meaningful price recovery be expected?

• Dramatic $1/bu. price declines following the March 28th Grain Stocks report — are prices now at levels in which demand is uncovered?

• U.S. winter wheat crop condition ratings are abysmal in HRW, better in SRW — how far can the market rally on reduced production prospects?

• As the trades attention pivots to weather for the row crops – what is the likelihood of row crop yields being realized?

• And, if so, the price implications.

These are a few of the items that we’d like to address this afternoon. Welcome to the discussion!

Below are trade expectations for USDA’s April WASDE which will be released tomorrow Wednesday, April 10 at 11:00 am CT.

A BRIEF DEBRIEFING

One cannot understate the extent in which the tone of the grain markets have been altered in the aftermath of the March 28 Quarterly Grain Stocks report. Physical supply in corn, soybeans, and wheat as of March 1, 2013 exceeded trade expectations to such an extent that the effect will be enduring. The substance of the report will restrain the inevitable rallies that will occur this growing season.

Not only has the historically tight old crop end stocks scenario in corn and soybeans been substantially relieved, but those additional bushels will find their way into the 2013/14 balance sheets in the form of higher "carry-in", as well. That is the net effect, fundamental reason, why dramatic price weakness was experienced in both old and new crop corn, soy, and wheat contracts.

The impact of the Prospective Plantings report is a far removed secondary consideration to the Grain Stocks report. A quick scan of the Planting Intentions numbers reveals corn and wheat coming in on the dime within trade expectations. So, the trade would cast them as "neutral".

"BULLISH" SOYBEAN ACREAGE FORECAST?

And what of soybean acreage? At 77.1 Mil acres planting intentions are a gaping 1.3 Mil acres below average trade estimates. That’s 400,000 acres less than what USDA offered up at the Ag Outlook Forum five weeks ago. Normally that might be called "supportive". Yet, November 2013 new-crop soybeans drop over $.25/Bu and close at the lowest level seen since late July 2012.

So, we project the same percent harvested acreage and trend yields of 44.5 BPA, as presented at the Forum, and we’re looking at production being a mere 19 Mil Bu less than the 3.405 Bil Bu forecasted.  The kicker is the (still current) end stocks number of 125 Mil Bu that was plugged in then. However, with 2^nd Quarter physical supply of 999 Mil Bu - some 50 Mil Bu above trade expectations – there are simply a larger physical supply of soybeans around than previously thought.

Whether that is a consequence of an underestimation of the size of the 2012 soybean crop or any other assorted factor on the demand side is beside the point. The reality is that a chunk of that 50 Mil Bu differential is likely going to find its way into old-crop end stocks and carried into the 2013/14 balance sheet. Going forward, look for old-crop soybean and soymeal export sales to slow and crush decline. Over time, these demand drivers can be expected to better align with USDA forecasts.   

Any lingering concerns held in some quarters that the US was going to run out of soybeans in 2012/13 should now be greatly diminished. That is what the market response to the reports telegraphed, not a personal opinion. The belief expressed here ( 3/16 post) that the old crop soy complex S & D dynamics had a historically strong track record of being able to reconcile the demand trajectory without a tumultuous spike higher in prices is reinforced.

EXPECT VOLATILTY

There is a full growing season ahead and values will be continually adjusting to each fresh fundamental input. Weather, planting progress, export sales, shipments, crush pace. There never is a ‘beeline’ drawn in the price discovery process.  In other words, despite a rather dramatic shift in soy fundamentals, pricing opportunities will be presented and be prepared to take advantage of them.

Ongoing trade focus is always going to be directed to evolving fundamentals. But keep this as an observation drawn from 30 years of experience in futures markets - though markets’ "price pivot" on fresh fundamentals (such as were presented today) they do so frequently in synchrony with a technical profile. Producers and end-users alike need to be mindful of both in the coming days.

Price action during the past week has validated the "Near Term" price constructive aspects presented in the March WASDE (3/8) for old-crop corn and wheat. The soy market is another whole story. Price radically departed from what was in essence a supportive balance sheet. As it stands, WASDE’s bottom-line end stock numbers of 125 Mil Bu for soybeans and 632 Mil Bu for corn were not then, and are not now "neutral".

Yet, post-crop report price strength in the soy complex has proven entirely fleeting. Despite the May soybean contract closing at the 3rd highest price level seen in over 4 months - $14.8050 Bu on Monday 3/11 – it ended up losing $.5450 Bu (-3.7%) on the week, settling at $14.26 Bu. Soymeal, arguably THE leader of the soy complex price with a sturdy fundamental and technical foundation, dropped significantly. May soymeal ended the week down $17.40/ton (-4.0%) to settle at $419/ton.

RATIONALE FOR SOY WEAKNESS

The blink of an eye, short-lived nature of old-crop soybean strength appears to signal that the market has come to accept the idea that a long awaited transition in export demand from the US to South America is firmly at hand. Recently, the market had been telegraphing via price behavior, skepticism on the sustainability of old-crop soybean and soymeal sales. Whether in the form of a daily soybean sales announcement released under USDA’s mandatory reporting system, strong weekly export sales, or robust export shipments – the price response to bullish demand news was invariably skittish. The market was found wanting in its ability to sustain rallies on fresh and presumably bullish demand news.

So the apparent error in my assessment – that the WASDE numbers should have been supportive to price in the Near Term - requires to be properly and straightforwardly addressed. In essence, on my part the notion was a considered subjective sense that the "transitional window" of export demand would remain cracked open for a short while longer. Consequently, an emphasis was placed on "Near Term" price support in the 3/8 post. But by no means was this time horizon definition of "Near Term" thought to exist for a day or two. Be that as it may, following this past week’s price action it appears that the window for elevated price levels is nearer to being closed, if not already being a fait accompli.

PILING ON WITH BEARISH NEWS

A market reacting indecisively to bullish news can be expected to fare poorly when confronted with less-than-bullish and over-the-line bearish news. And there was nothing fundamentally bullish offered up during the past week.

1.) Monday’s (3/11) soybean export shipments of 17.114 Mil Bu were below the low end of the range of trade expectations.

2.) Thursday’s (3/14) net export soybean sales of 783,700 MT’s (for the week ending March 7th) came in at the lower end of trade expectations. And despite 657,700 MT’s (24.16 Mil Bu) were clustered within old crop sales. China’s portion accounted for 183,500 MT’s (6.74 Mil Bu) - 28% of the total.

3.) Soymeal sales of 51,700 MT’s represented a dismal marketing year low and were barely 20% of the volume seen just two weeks ago.

4.) Friday’s (3/15) NOPA soybean crush stats for February (136.6 Mil Bu) fell below the low end of the trade expectations, as well as being down 22 Mil Bu from Jan. Crush indeed. Kind of a coup de grace to end the week.

HOW BEARISH IS IT?

Before leaning a too forward on the ski’s here, there were interesting and what appear as being not in the least bit bearish twists, in the latest soybean export sales report. The numbers pushed current marketing year export sales (shipments + outstanding sales) to 1.304 Bil Bu. We’re going to return to the implications of the two categories – "shipments + outstanding sales" – shortly, because their relationship is decisive in bringing the challenge of future rationing of export sales demand into clearer focus.

Consider that USDA has held fast to a soybean export forecast of 1.345 Bil Bu for several months, even as the sales pace was dramatically accelerating. Now, with 24 weeks remaining in the marketing year (which runs through August) sales are at 97% of forecast. Some quick, back of the envelope, calculations reveal that something has to give – like in an eye-popping way. The market believes this disproportionately front loaded sales picture will be corrected and aligned to the forecast over time.

Similarly, while the most recent soymeal sales tally was dismal, as with soybeans, some insight can be gleaned by parsing the sales numbers to date (3/7). There are 7,523 TMT’s currently committed versus USDA forecasted sales of 8,074 TMT’s. So, current marketing year sales stand at 93% of forecast. The marketing year for soymeal runs through September, so 28 weeks remain. Unlike soybeans, USDA did raise their soymeal export forecast in the March WASDE - by 100,000 short tons to 8,900. Remember, WASDE soymeal export sales forecasts are expressed in short tons, while USDA’s Foreign Agricultural Service reports soymeal sales in metric tons. It can get a bit befuddling, but the conversion is 100,000 short tons = 90,700 MT’s.

RECONCILING SOYBEAN EXPORT FORECASTS IN 2nd HALF OF THIS MARKETING YEAR

The pathway to reconciling the extraordinary high export sales commitments in soybeans and soymeal is basically two-fold.

1.) Reduce future export sales (dramatically)

2.) Shift existing sales on the books to South America, i.e. cancellations (dramatically)

Both are required if the current forecasts for the 2012/13 marketing year soybean and soymeal exports are not to be exceeded. The rub is that the "shipments" portion of soybean export sales currently stands at 1.164 Mil Bu (89%). These are soybeans "out the door" – they are gone. Sales on the books "outstanding commitments", yet to ship, stand at 140.6 Mil Bu (11%).

It is this last category that warrants ongoing scrutiny. Of that 140.6 Mil Bu, China accounts for only 41.4 Mil Bu (29.5%) of the total. That is an exceptionally light tally in both actual Bu terms, as well as percent of total. For a relative comparison/contrast we need go back to this same timeframe in 2010/11 when Brazil harvested a then record 75.3 MMT’s of soybeans. The week ending March 3, 2011 China’s "outstanding commitments" in soybeans from the US stood at 136.5 Mil Bu (46%) of a Grand Total of outstanding commitments of 296.4 Mil Bu.

The difference between US soybean export prospects at this time 2 years ago is stark. The numbers speak for themselves. The driver of US soybean export sales has a very light footprint in 2013, compared to 2011. The idea that USDA’s forecast of 1.345 Mil Bu of soybean exports must ultimately be exceeded is not supported by recent, relevant, and rather parallel circumstances that existed in this timeframe two years ago. They haven’t budged on their soybean export forecast since November; there is not any compelling reason for them to do so in the foreseeable future. The USDA stands on firm ground.

Now will China ultimately increase their net old crop sales bookings with US, in light of the massive crop coming out of South America? Most certainly. The extent in which existing commitments, as well as forthcoming sales, are shipped is another matter. Presently, a lagged shipment pace out of Brazil is the principle glue keeping the actual US soybean exports together. Those are wrinkles that will be ironed out soon enough.

As the price behavior of the past week has more than hinted, the market is well into an anticipatory mode on the export sales pace. It is not a question of if, but rather when the sales/shipment flow subsides. For producers holding onto old-crop soybeans, this appears more likely to evolve as price erosion. Identifying price resistance levels is likely to be easier, than those areas of support. Don’t believe that everything is going to Hades in hand basket at once. But it seems this idea of Near-Term support has now passed all too quickly.

It may be true that the bottom-line end stock numbers on USDA’s March WASDE report did not vary dramatically from trade expectations. While conventional wisdom suggests it should therefore simply slide somewhere into that backwater category known as "neutral" – it was nothing but.

The tale of the tape – price response to the report – is a better gauge of the impact and magnitude of any reports intrinsic value in adjusting trade sentiments to the market. If that be the case then what USDA presented in the March WASDE can be reasonably characterized as price supportive perhaps not in the long-term, but rather constructive near-term.

Without parsing well-publicized specific line items in the S&D ledger there are some noteworthy observations that can be made. And those are clustered in the row crops – corn and soybeans. While corn experienced revisions to the current 2012/13 marketing year forecast in both supply & demand, the net result was a wash – the end stock forecast remains at a historical and uncomfortably tight 632 Mil Bu. Likewise, with not a single line item being revised in the soybean balance sheets at the end of the day USDA saw fit to retain its February end stock levels of 125 Mil Bu.

Now, consider for a moment that trade expectations going into the report were subdued – there was not any wide held belief that any dramatic revision to end stock levels were really in the cards. Whether using revisions expressed in Mil Bu or in percent terms, the trade was at best anticipating a rather miniscule "nip & tuck". You could say revisions that were almost cosmetic in nature.  The modest expectations were so slight, that even if they had been realized, it can be argued that the real net effect on forecasted physical supply would have not been meaningful.

Sifting through the numbers in the table below should provide some statistical perspective on trade expectations versus actual numbers.