How did the Trade Miss the Soybean Report by so Much?
May 10, 2016
TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND MAY NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.
On Tuesday the USDA presented their first set of new crop (the crop going getting planted right now) estimates on a monthly WADSE report. The new crop soybean carryover was by far the most shocking number on this report. The trade was expecting a new crop carry over of just over 400 million bushels and the USDA reported new crop soybean carryover at 305 million bushels. How did this happen?
The production number for new crop soybeans was pretty much a given. We knew the USDA was going to use the acreage estimates from their March 30th Planting Intentions report and the yield would come from the trend line yield outlined in the Feb 26th Ag Outlook Forum. What changed was demand. The USDA "found" an extra 225 million bushels of demand between old crop and new crop. Most of which came from export sales.
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The question is then - where did this demand come from? To some extent it can be explained by a reduction in the South American crop. The logic here is that if South America produces less then we may get a bigger chunk of the global business. While this may be true to a degree it may not justify a 145 million bushel increase in export demand year over year. Furthermore, while new crop soybean export sales have seen an uptick in recent weeks we are still behind the normal pace at this point. This makes it difficult to justify and nearly impossible to have predicted this move by the USDA.
While we may in fact end up with stronger exports year over year a lot of that may depend on what happens with the US$ and soybean prices. It is rather uncharacteristic of the USDA to make these sorts of changes this far out. They may be suggesting that they expect the US$ to decline sharply (where do they get their info?), or they could be assuming soybean prices back in the mid $9 range.
Maybe the biggest reason the trade was so wrong on the USDA's soybean balance sheet is because the balance sheet they laid out in the Ag Outlook Forum back in February was night and day different from what we saw today. Typically the USDA does not make too many changes to their Ag Outlook balance sheet, especially increasing demand on higher prices. So, the USDA threw the market a huge curve ball on this report and made a drastic departure from their own numbers.
Going forward it will be interesting to see how the trade digests this shocking WASDE report. While the 305 million bushel new crop carry over is certainly much less than expected it may not take long before the trade starts saying - yeah, but... For one, looking for a record export demand when so far we are not at a record pace seems somewhat questionable. Secondly, (maybe more importantly) there are a lot of things that have changed since the acreage survey was taken back in early March.
Weather in the delta, the far eastern and western parts of the corn belt may have shifted some acres from corn to soybeans. Price has also been a major factor with soybeans rallying over $2 a bushel since the survey was taken while corn is about 10 cents higher. In the next few weeks we may learn that 1-2 million acres of corn was switched to soybeans and that would have a big effect on increasing new crop soybean carry over once again.
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Give us a call if you would like more info on the strategies we are using or if you would like to set up an account to put a plan in action. Ted Seifried - (312) 277-0113. Also, feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit. Follow me on twitter @thetedspread if you like.
July Corn Daily chart:
July Soybeans Daily chart:
July Wheat Daily chart:
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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