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At first glance the number that sticks out the most on this Quarterly Grain Stocks report is soybean stocks. This number represents old crop soybean ending stocks and therefore new crop soybean beginning stocks. Soybean stocks stick out the most because at 92 million bushels not only did this number come out well below trade expectations but it was below the low end of trade guesses and it is the tightest ending stocks figure we have seen in soybeans for a long time. This certainly has an impact on the new crop soybean balance sheet, but was there another number today that may have a bigger impact?
At 92 million bushels this is the lowest soybean ending stocks figure in recent history and it is well below what is generally considered bare minimum "pipeline" supplies. For comparison, even the drought effected 2012 crop had an ending stocks figure almost 50 million bushels higher. In other words we were dangerously close to running out of soybeans. This tight situation has been somewhat reflected in the cash market in the last few months and may have caused sharply higher futures prices if we had seen it earlier. So at face value this is a very bullish number vs trade expectations but it may have come too late to get too excited about considering the massive crop we are in the process of harvesting.
It will be interesting to see how the USDA handles this on the upcoming WASDE report on October 10th. In the last few reports the USDA has made a fine mess of the old crop soybean balance sheet by using a negative 94 million bushel residual. On paper is one thing but in real life this hugely negative residual is impossible as the residual, by nature, is a positive number. So, the question will be - does the USDA leave demand unchanged and move the residual to a more natural number of at least zero or even a positive number? Or, does the USDA continue to push the unrealistic negative 94 million bushel residual and increase demand or decrease imports? Or a combination of both? We would hope to see positive residual number on the next report which would suggest demand would stay unchanged or be up only slightly.
How the USDA handles the old crop balance sheet will have an impact on the new crop balance sheet. If they were to choose to leave the residual at a negative number and increase demand this could suggest that demand for new crop soybeans should be going higher as well. Either way the drop in ending stocks will have an impact on the new crop balance sheet as lower ending stocks for old crop mean lower beginning stocks for new crop. Right now, if we were to leave everything else on the soybean balance sheet unchanged we would see new crop soybeans ending stocks drop to 437 million bushels down from 475 million just based on lower beginning stocks alone.
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But there was another number released by the USDA today that may end up impacting the new crop balance sheet even more then implied demand or beginning stocks. Along with this Quarterly Grain Stocks report the USDA took the opportunity to revisit 2013 production. This was highly expected as most analysts felt they were too low on production and we were concerned they had missed some bushels or acres during the two week government shut down during harvest last year. As it turns out they missed a little bit of both. The USDA updated 2013 soybean crop by increasing production by 69 million bushels to 3.358 billion bushels. They did this by increasing acreage by a little over 300k acres and increasing the national average yield by .7 bushels an acre.
This increase in production and how it was done could have two potential impacts on the new crop soybean balance sheet. One, this helps explain some of the difference in gaurenteed acres we have seen between NASS and FSA. Last years number may have simply been too low. Two, and maybe the most important feature of the reports today, is that with yields increasing for last year this could be suggesting that yields for this year are understated as well. With USDA NASS crop conditions 19 points higher in the good to excellent year over year we would expect the national average soybean yield to be 3.6 to 4.6 bushels an acre higher as well.
This would suggest that the USDA may need to increase their current yield estimate by 1-2 bushels an acre which would impact final production significantly. Based on the USDA's current harvested acreage figure every 1 bushel an acre increase in yield equated to about an 84 million bushel increase in production. If this is the case we would expect a higher production figure to more then offset lower beginning stocks and slightly higher demand leaving us with an even larger projected new crop soybean ending stocks number.
This assessment is based on logic and reasoning. The USDA however, does not always feel inclined to be bound by such things like we do in our every day life. The negative 94 million bushel residual that they presented on the September report was evidence of that. So, this sets up for what will be a very highly anticipated October 10th USDA WASDE report when they will address the balance sheets.
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While the USDA can be unpredictable at times and other times be just flat out un-comprehendible we would think that the very good crop conditions will sway them toward raising their new crop soybean yield which could lead to a higher ending stocks estimate. We would also think (maybe hope rather) that given the opportunity they would like to fix the broken old crop balance sheet by remedying the negative 94 million bushel residual figure and not trying to play around with other demand numbers that we have a pretty good handle on such as exports or crush.
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December Corn Daily chart:
November Soybeans Daily chart:
December Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or email@example.com
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Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.
FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION.