Dissecting the USDA's Old Crop Soybean Balance Sheet
Jul 11, 2014
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The USDA managed to surprise the trade again with the July World Agricultural Supply and Demand Estimates (WASDE) report. In particular the old crop soybean balance sheet took the market by surprise. As the dust begins to settle lets take a look at the breakdown of the old crop soybean balance sheet.
The old crop soybean balance sheet was one of the biggest surprises of the report. There had been a lot of burning questions for months now about how the USDA was going to handle the old crop soybean balance sheet. For one, exports had been running well above the pace of the USDA's projections. The crush was also running higher then the USDA's projections and with so many planted acres soybeans for seed should have been higher as well. It could be argued that the import number was also too high.
All of this suggests that the already tight USDA ending stocks estimate of 125 million bushels could in fact be much tighter. However, at the same time the cash market was not reflecting this perceived tight situation. Also, the June 30th grain stocks report was suggesting more soybean stocks as well.
The USDA addressed all of these old crop soybean issues on this July report. They decreased soybean imports 5 million bushels to a more believable 85 million bushels. They increased crush demand 25 million bushels which puts us more in line with reality. And, they increased exports 20 million bushels to 1.62 billion bushels which is still behind the current commitments number but could end up being very close to the actual shipments number. The USDA also increased soybeans used for seed by 4 million bushels. In all this represents a 54 million bushel decrease in soybean stocks. So this means that soybean stocks dropped to 71 million bushels, an historically low ending stocks number right? Well....
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It was fairly obvious that the USDA could not decrease demand even though the soybean stocks were higher then expected, so they were left with a dilemma. How to show more soybean stocks while at the same time increasing the demand side of the equation. In reality this seems mathematically impossible. Well, problem solved thanks to the residual category... The USDA went from a residual of 0 to a residual of Negative 69 million bushels (yes, negative). This more then offsets the increases in demand and increases ending stocks to 140 million bushels. And this shocked the market.
To understand this we need to talk about what that residual category represents because the USDA certainly did not explain any of this in the report except for saying the change was due to the June 30th Quarterly Grain Stocks report. The residual category is the USDA's miscellaneous category. This may have originally been intended to account for perished soybeans and other small uses. Most years this number is positive but in fairly recent history we have seen some small negative numbers here, but nothing close to a negative 69 million bushels.
What this likely means is that the USDA got the production number wrong last year but does not have a way to quantify that and therefore is reluctant to go back and change last year's production at this time. It would have been unprecedented if they had done that on this report, but then again so is a negative 69 million bushel residual. To a point it would be somewhat understandable for the USDA to have made a miscalculation on last years final production numbers as they were shut down during a key time when then needed to be in fields collecting yield data. They may have missed some of the higher yielding fields. Either way, this leaves us with a more comfortable old crop carry over even if it makes for an awkward (or unbalanced) balance sheet to look at.
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December Corn Daily chart:
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All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, 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 firstname.lastname@example.org
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