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Be Ready for Price Swings on Friday

05:15AM Jan 10, 2013

The one certainty to be in Friday’s plethora of USDA reports is a surprise or two.

One of the most-important USDA report days of the year will take place Friday. At 11 a.m. CDT, USDA will release its World Agricultural Supply and Demand Estimates, Crop Production, Annual Crop Production, Grain Stocks and Winter Wheat Seedings.

Rich Nelson, chief strategist at Allendale, a brokerage services firm in McHenry, Ill., says these will be "ugly" reports with a lot of surprises. These surprises will likely cause dramatic price swings for corn, soybeans and wheat.

He says in 2012, there was a 40-cent swing between the closing price of corn the day before the report and the close the day of the report. "I would not go heavy into this report, betting you’ll get these numbers right." He says there are a lot of things USDA can do which can throw a wrench into expectations.

So, where could prices fall after the market digests this huge amount of information? That will depend on the supply and demand picture USDA paints.

In am Allendale webinar earlier this week, Nelson reported that his firm expects corn production to drop from 10.725 billion bushels down to 10.618 billion bushels. Yet, he doesn’t expect this moderate drop to have a huge impact.

"What we are watching much more closely is demand," he says. "This demand issue is much worse than most people think right now."

Allendale expectations include a 50-million-bushel drop in ethanol production, another 50-million-bushel drop in feed usage and a 100-million-bushel drop in exports.

"USDA thinks ethanol production will be 10% lower than last year," Nelson says. But, he says, for eight of the past 11 weeks, ethanol production has been far below the expected 10% decrease. "We think USDA is going to step up and drop ethanol production."

Even though many recent livestock reports haven’t shown a remarkable reduction in herds, Nelson says the high price of feed is still causing a reduction in use. He says that high feed prices probably may not have dropped the overall numbers for livestock inventories, but the feed going into each head dropped.

Exports are the biggest problem area, Nelson says. "Year-to-date exports are running about 50% less than last year, and last year was a low number to start with. USDA will have to make changes to exports." He says USDA will likely take a baby step on Friday in reducing exports, then further reduce them in months to come.

Because U.S. corn export prices are so high, the world has started shopping around. It is no surprise, Nelson says, that other countries prefer to purchase corn from Argentina, where the corn export price is $6.78. That is significantly lower than the U.S. Gulf price of $7.59.

corn export prices   Allendale

Allendale’s expectations are for ending stocks to come in at around 760 million bushels. With this bearish estimate, the firm is pegging the March corn price to fall between $6.80 and $7.40. "This market is undervalued. The low prices we are seeing right now are based on numbers, but fear, liquidation and bullishness."

Nelson says he believes soybeans are also undervalued right now. Allendale raised soybean production using 75.582 million harvested and a 39.4 yield. The firm is expecting 141 million bushels for ending stocks, which is substantially larger than USDA’s December estimate of 130 million bushels.

"Like corn, expect a big price reaction to Friday’s reports," he says.

As for wheat, Nelson thinks USDA’s estimates are correct. He says even though the numbers for wheat won’t likely have big changes in store, don’t discount some price movement. "Wheat is a follower in this report. Normally we get a big price response."

Friday’s Winter Wheat Seedings report will be the first look at the 2013 wheat crop. Allendale is expecting an increase of 2.1 million acres of winter wheat.


New Information on the Horizon
Here's what you need to know going into Friday's reports. Read AgWeb's Pre-Report Analysis, News of Jan. 11 Reports.

See current market prices in AgWeb's Market Center.