USDA October Crop Reports – Fundamentals & Structural Reinforcement

Published on: 18:31PM Oct 11, 2012

Any lingering trade notions that corn, soybean, and wheat prices will experience systemic price weakness in the near-term have been largely dismissed following today’s USDA crop reports.  The U.S. balance sheets for corn and soybeans are tight as a drum. And the question marks surrounding the adequacy of world wheat supply remain in place.

If this were a three legged stool, then all three legs appear to have been structurally reinforced by USDA’s numbers today.  The supply-side of the equation for corn and soybeans has essentially realized closure. While USDA/NASS will revisit row crop production projections in the November 9th Crop Production report, historical patterns suggest that any revisions will not be altered in any dramatic degree.  If anything, the outlying risk of a change to either corn or soybean crop size resides in the area of a decrease, rather than increase.
For corn, it is clear that the shift in late-season weather towards generally cooler temps proved inadequate. There was not any accompanying above-average precipitation to coax more fill in moisture starved kernels. To ask of Mother Nature to provide the right elements to fill a corn crop as agronomically advanced as this 2012 crop, was a daunting proposition. Certainly, ear counts were not going to magically appear. Ear weight was the only vehicle to enlarge the overall U.S. crop. It obviously didn’t happen where it counted. And if didn’t happen by now… it isn’t going to.
The one supply-side item still capturing the trades’ attention in this post-crop report timeframe is the historically high percentage of the crop USDA continues to designate as being harvested for grain. Not only did the October Crop Production report not retreat in this area, but served up numbers to modestly reinforce the situation.

With the benefit of FSA data planted acreage increased to 96.946 Mil Acres (+500,000) and harvested acreage placed at 87.721 Mil Acres (+300,000). From a percentage standpoint, the change in the Plant/Harvested acreage is as close to nominal as one can get. The persistently high (now .905 percent) harvested acreage figure almost appears to as a subtle message to the naysayers – those who believe USDA is overestimating how many acres are ultimately going to be shelled in a drought ravaged crop year. I am in the naysayers’ camp.  Even after allowing for improved genetics, rapid harvest pace, etc. – it remains a curious statistic.
While the 2012/13 marketing year end stocks levels in corn are already at minimal pipeline levels, soybean end stocks appear to be on a similar trajectory. There is even this fringe idea circulating that the U.S. will ultimately be required to import South American soybeans to meet domestic demand. It seems like too dramatic a proposition at this point. Given, a relatively small quantity of South American soymeal has regularly been floated up to the East Coast for years…and more recently Brazilian corn. The rub is not whether or not South American soybeans ultimately are shipped to the U.S., but rather that the idea is being "floated".
This idea of soy demand outstripping supply is given some credence by how efficiently the hefty 2.5 BPA  soybean yield mark-up and resulting 226 Mil Bu increase in production, was readily absorbed on the demand side of the ledger.  The net result – a 15 Mil Bu increase in end stocks to 130 Mil Bu - is not a bearish development. Odds of the U.S. soybean crop increasing or decreasing in subsequent reports appears as a statistical toss-up.

Though structurally sound fundamentals, aligned in a mutually supportive fashion are in place that is no reason to for any producer to get lackadaisical with marketing. Be mindful of your local basis. And that even under the best of circumstances, unpriced production/inventory always carries with it unknown price risk. Perhaps the best option is options - on futures.