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March 2013 Archive for Recon Ag Marketing

RSS By: Greg Wagner, AgWeb.com

Greg Wagner is president of GWX – Ag Advisors. For over 25 years, he has specialized in advising agricultural producers and end-users on marketing and risk management decisions. GWX Ag Advisors integrates fundamental and technical analysis, combined with experienced historic perspectives of agricultural markets in the decision-making process.

 

Soybean Physical Supply Will Continue to Trump Acreage

Mar 28, 2013

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 2nd 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.

 

Deconstructing Soy Complex Support

Mar 16, 2013

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.

March WASDE - Not a Neutral event

Mar 08, 2013

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.

March 2013 WASDE Variance Table

Now the old-crop grain markets has been provided with what should be a fundamentally a price supportive structure near-term. And the emphasis is on Near-Term. Technical support and resistance levels, as well as key pivot points and timeframes have realigned in the wake of the March WASDE. They need to be monitored in consideration of booking old-crop sales. Please feel free to contact me on specific updates.

USDA Ag Outlook Forum - Focus on 2013 Corn Yield

Mar 01, 2013

The grain market balance sheets presented at the USDA Ag Outlook Forum represent a first glimpse of an earnest effort to define the contours of the balance sheets of grain markets for the 2013/14 marketing year. Given that it is an earnest and collaborative USDA interagency effort, it is also recognized as being inherently tentative. That tentative aspect opens a pathway for some broad-based quibbling over virtually each and every line item of the balance sheets.

The fact that corn, soybean, and wheat markets took the numbers in stride is a testament to the fact that the USDA forecasts are pretty much in sync with those already circulating in the trade. By default both USDA and the trade must proceed with a set of assumptions on weather. That is the dominant consideration from which all else arises. The S&D balance sheet on corn displayed in this post provides some perspective of the upcoming 2013/14 crop marketing year. As well as the current 2012/13 and two proceeding seasons.

USDA2013 AgForumCornBalanceSheet

Although there are a number of S&D line items in the 2013/14 forecast that warrant particular attention, for the moment I will focus on one. The one line item that I regard as "numero uno" is – YIELD.  

1.)    It appears that perhaps the most prominent point of contention is focused on yield. With a forecasted 163.6 BPA yield, it appears that a majority opinion has coalesced behind the idea that it is too high. It can be reasonably assumed that given the current USDA yield model, this yield can be attained.  What is not being addressed is the potential for that 163.6 yield not only to be attained, but exceeded. With national average corn yield history over the past 20 years as a guide, a sound an argument as any can be made on this point. Two particulars years’ standout – 1994 and 2004. 

In 1994, the US was emerging from the "Great 500 Year Flood" of 1993. Yields leapt from 100.73 BPA in 1993 to a record 138.63 BPA in 1994. This also contributed to the first ever 10 Bil Bu corn crop. Understood is the argument that there was ample subsoil moisture in 1994 and weather cooperated, as well. Even so, that 1994 yield represented not only a rather profound 38 BPA YOY increase, but exceeded the prior record yield of 131.5 BPA set in 1992 by 7 BPA or 5%. We have a new benchmark.   

Wind forward 9 years, yes it took that long, before that 138.63 BPA was exceeded – 2003 established a fresh record yield of 142.24 BPA.  That’s a rather marginal 3.61 BPA betterment or 2.5% than was realized in the 1994 benchmark. Particularly the number of growing seasons it took to establish a fresh record high yield. Also, it was relatively unimpressive in percentage terms, as well as actual bushel terms - the 2003 versus 1994 BPA increase was one-half of the 1992 versus 1994 yield jump. 

Ah, but it didn’t take very long at all for record the 2003 record corn yields to get interesting again - the next growing season, 2004. Yes, as perfect mixture as you can get in the heart of the Corn Belt pushed national average US corn yields to what was then an unimaginably high of 160.39 BPA. That blew through the prior year’s record yield by over 18 BPA or 11.3%! 

The most entry into the tale of record corn yields occurred in 2009 when national average corn yield hit 164.7 BPA. It took 5 years and the old record was bested by 4.3 BPA or 2.5%. 

Now with USDA penciling in a yield of 163.6 BPA for 2013, I regard that as being reasonable. Recall, they came out of the gate in 2012 in the May 2012 WASDE (the May WASDE which is the first official S&D balance sheet for the marketing year) with a record yield of 166.0 BPA. Of course, subsequent and humanly unpredictable Mother Nature driven events, whittled that down to 123.4 BPA.    

I make every diligent effort to be familiarized and acquainted with the arguments – bullish or bearish. And what catches my attention at this time is this analytical lean by the trade that USDA’s 2013 forecasted corn yields at the Ag Outlook Forum are a tad too high. Yet, there is deafening silence on this issue, supported by history, that corn yields in 2013 may exceed these conventional expectations. If 2013 ultimately proves to be a beneficent "outlier" in the yield bell curve, the market will be turned on its head again, but in another direction.  Do not rule out national corn yields as high as 173 BPA in 2013. They exist somewhere   in the pipeline and the will be attained in the historical not too distant future.  It’s something producer’s should not be in the company of the general consensus and dismiss such prospects out of hand.    

 

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