As I’ve said countless times over the years, USDA’s January set of numbers are the Super Bowl (overhyped), Daytona 500 (a lot of noise) and Kentucky Derby (come and gone quickly) of government reports. So much is made over so little actual information by so many. Keep an eye on post-report chatter, because most of it will be over numbers that simply don’t matter, or at least don’t matter as much as one, single number.
USDA will release its latest Crop Production, Crop Production Annual Summary, Quarterly Grain Stocks, Winter Wheat Seedings and World Agricultural Supply and Demand Estimates (WASDE) reports at 11 a.m. CST Friday.
What is this “one thing” as Curly (from the movie “City Slickers”) would call it? In my not-so-humble opinion, it is corn quarterly stocks as of Dec. 1. Those of you who follow along with my analysis won’t be surprised by that proclamation, I’m sure.
Another thing I’ve often said is that after USDA’s January fundamental smorgasbord, all we really know — and not completely at that — is total supplies of corn, soybeans and wheat. Because USDA has no clear crystal ball, we won’t know any more about total demand than we did before. But upon further review of my studies, that isn’t necessarily true. At least not in corn.
My table of historical quarterly stocks numbers shows an interesting and consistent pattern covering not only the previous four years (a similar set given all-time highs on U.S. production) but also the previous 11 years (from the beginning of corn’s demand market with the 2006-07 marketing year). That is first quarter (Q1) usage of corn, discernable by subtracting Dec. 1 stocks on hand from total supplies, amounts to, with little variation over the years, roughly 31% of what total demand ultimately turns out to be.
If we take a look at the pre-report table, we see the average estimate for Q1 corn stocks came in at 12.407 billion bushels (bb). My estimate, based on last year’s Q1 stocks of 12.386 bb and this year’s total supply estimate (through the December report) of 16.922 bb, is 12.5 bb. Using that figure, total 2017-2018 demand would be projected at 14.255 bb, as compared to USDA’s current projection of 14.485 bb, putting ending stocks at 2.667 bb and the ending stocks-to-use ratio at 18.7%. That, my friends, would be a bearish scenario indeed.
Taking another look at the pre-report table shows an average estimate of corn production coming in at 14.557 bb, down 21 million bushels (mb) from USDA’s previous estimate. Note that this becomes part of, theoretically at least, a pre-report average estimate for Q1 stocks of 12.407 bb, nearly 100 mb below my rough estimate. That doesn’t seem like much, does it? But the ripple effect would be noticeable, particularly if we assume total supplies are reduced by a similar 21 mb (difference between production average estimate and USDA’s previous projection) to 16.9 bb. This creates a total demand scenario of 14.484 bb, in line with USDA’s current projection, and creating a familiar 21 mb decrease in ending stocks to 2.416 bb. Ending stocks remain nearly unchanged at 16.7%, putting the average cash price estimate at $2.70 (based on analysis of the previous 11 years’ ending stocks-to-use and average cash price).
Corn’s old-crop futures spreads have stabilized over recent weeks, suggesting the commercial side has found an equilibrium at current bearish levels of carry. This would suggest a neutral (unchanged) set of numbers from USDA is more likely. If futures spreads were still in strong downtrends (strengthening carry), it would indicate a more bearish set of numbers, in line with my initial projection, than was expected.
The next set of numbers that should, but won’t be, watched is winter wheat planted acres. Pre-report estimates averaged 31.4 million acres (ma) for all winter wheat, down 1.3 ma from the previous year. Hard red winter wheat acres (HRW) are expected to lose 1 ma from last year’s 23.4 ma, with soft red winter (SRW) and white winter expecting only fractional decreases.
If realized, and they should be, a set of numbers like this makes recent weather across the U.S. Southern Plains HRW growing region that much more interesting. Ongoing dryness, some areas haven’t seen precipitation in up to 100 days, and wildly fluctuating temperatures could create increased concern over the U.S. HRW crop. A look at the new-crop July Kansas City weekly chart shows an uptrend that is gaining strength, indicating the market is already registering awareness of potential problems with production next summer.
Last, and certainly least in this case, is soybeans. Given USDA’s pathetic track record of estimating domestic soybean ending stocks, any attention paid to its January numbers is too much. Of more interest could be what USDA decides to do with South American production in its WASDE tables. Again, though, if USDA can’t calculate domestic production, how in the world should we believe it has a grasp on the global situation? While some will get all worked up over this part of USDA’s January cornucopia, I won’t be among them, regardless of what the numbers turn out to be.
Why? The 2017-2018 soybean forward curve (series of futures spreads) has actually seen its carry weaken of late, indicating a less bearish commercial view of supply and demand. While USDA isn’t likely to agree with this assessment, the bottom line is, again, it has no clue, or perhaps no desire, to show actual domestic supply and demand.
|U.S. CROP PRODUCTION 2017-2018 (million bushels)|
|WINTER WHEAT ACREAGE (million acres) 2018-19|
|QUARTERLY STOCKS (billion bushels)|
|(Report date 1/12/18)||12/1/17||Avg.||High||Low||9/1/17||12/1/16|
|U.S. ENDING STOCKS (billion bushels) 2017-2018|
|WORLD ENDING STOCKS (million tonnes) 2017-2018|
|WORLD PRODUCTION (million metric tons)|