Key Take-Aways From USDA's February S&D Report

08:23AM Feb 11, 2014

What Traders are Talking About:

Overnight highlights: Corn futures finished around 1 cent lower overnight, while beans were 5 to 10 cents lower with old-crop contracts leading the decline and wheat futures were mostly 1 to 2 cents higher. Beans are the key to price action today. If they extend overnight losses, it will pull corn lower and likely dry up buying interest in wheat. Cattle and hog futures are trading lower in electronic trade this morning.


* Key takeaways from USDA's reports. USDA left its U.S. soybean carryover forecast unchanged, but lowered its corn and wheat ending stocks projections more than anticipated in yesterday's Supply & Demand Report. For soybeans, USDA raised its export forecast as expected, but offset that with higher imports and less residual "use" to hold carryover steady. While soybean residual use is down to 12 million bu., USDA said, "Projected residual use remains above the exceptionally low level of the past two marketing years." That statement seemingly signals USDA still has 12 million bu. of "play" that will allow it to keep carryover at 150 bu. in the coming months. The report data drew a negative price response that appears to have put a short-term top in the market. Globally, USDA upped its Brazilian soybean crop estimate to 90 MMT, which is now in line with many private estimates and the new Brazilian government forecast (see next item). Interestingly, however, USDA is going up on its Brazilian estimate while others are coming down. It appears USDA is trying to play catchup. For corn, the export bookings pace warranted a sharp increase in the export forecast and USDA obliged by raising it 150 million bu., which was 125 million bu. more than traders expected. This type of increase in exports is virtually unheard of from USDA at this point in the marketing year, even with the export bookings pace running above the new level, which begs the question, did USDA go too far too early? For wheat, projected exports were raised 50 million bu., but imports were also raised 10 million bushels. USDA is basically saying the U.S. will export a portion of Canada's wheat supplies due to logistic problems north of the border.

The long and short of it: Corn is struggling to find support from the positive report data as soybeans are dragging them lower. Wheat is trying to fight its way higher, but that's going to be extremely difficult to do if beans roll over and pull corn lower.

* Brazil lowers soybean, corn crop estimates. Conab, the statistical agency of the Brazilian government, trimmed its soybean crop estimate to 90.01 MMT from 90.31 MMT previously and cut its corn crop estimate to 75.47 MMT from 78.97 MMT last month. The head of Conab says hot, dry weather in southern Brazil could impact next month's crop estimates, but that wasn't the reason this month's forecasts were lowered. For corn, the 3.5-MMT reduction was the result of a smaller safrinha (second crop) estimate. Conab had been using last year's safrinha production figure until now. Conab now forecasts the safrinha corn crop at 42.8 MMT versus 46.2 MMT last year.

The long and short of it: With the late-season heat and dryness in southern Brazil threatening soybeans in the region and reduced incentive to plant a second corn crop, I expect Conab's soybean and corn crop estimates to decline next month.

* ABARES raises Aussie wheat crop estimate. The Australian Bureau of Agriculture Resource Economics and Sciences (ABARES) raised its 2013-14 Aussie wheat crop estimate to 27.013 MMT from 26.213 MMT previously given a strong Western Australia crop. In Tuesday's report, USDA left is Australian wheat crop estimate at 26.5 MMT, and interestingly, commented that "a reduction in expected exports from Australia" was one of the reasons for its 50-million-bu. rise in projected U.S. wheat exports. ABARES didn't issue a wheat export projection for 2013-14 in its latest crop update, but a bigger crop estimate sure doesn't suggest there will be reduced Australian wheat exports.

The long and short of it: Wheat futures have posted a nice price recovery off the winter lows, but bulls still have a lot of work to do. I'm still firmly in the camp that price strength must be sold in the wheat market.


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