by Darin Newsom, DTN Senior Analyst
OMAHA (DTN) -- The most interesting aspect of Friday's crop production and supply and demand reports should be how USDA manages the bottom line in both soybeans and corn. With talk in the trade putting ending stocks of both near zero, it will take some "deft" accounting to hold corn ending stocks-to-use above the historic low of 5% and soybean ending stocks above that magical 100-million-bushel line. History tells us that neither of these levels will be broken, regardless of what it takes.
In July, USDA dropped its national average corn yield an unprecedented 20 bushels per acre, sending skeptics scattering after much talk that the organization may not have noticed the adverse weather in June. Now, with an even worse July behind us, the question has become whether or not USDA will trim another 20 bpa off yield and let the chips fall where they may.
The average estimate heading into the reports is 126.2 bpa as compared to USDA's July number of 146 bpa. This puts total production below 11 billion bushels at 10.971 bb, the lowest production number since the 2006 crop. Crunching the numbers further gives us harvested area of just over 86.9 million acres, roughly 10% below the current planted estimate of 96.5 ma.
This 10% is well below the 14% differential seen in 1988, a year often held up as analogous to the drought seen in 2012. In order for a 14% reduction to be seen this year, USDA could play its increased planted acreage card, a move that would not be surprising or easily explained.
Using the projected 10% differential between harvested and planted, resulting in sub-11 bb production, some dramatic decreases will need to occur to hold the ending stocks-to-use ratio at 5%. If beginning stocks are adjusted back to only 945 mb and exports are increased slightly to 35 mb, total demand would have to decrease by 1.42 bb to hit the expected 2012-2013 ending stocks figure of 651 mb. This puts ending stocks-to-use at a "safe" 5.8% -- mission accomplished smoother than landing a dune buggy on Mars. Where are demand cuts to be made? Exports and feed categories are the prime suspects, though ethanol could be whittled back another 100 mb to 200 mb.
When it comes to domestic soybeans, USDA finds itself in a position similar to a researcher detailing the offspring of Bigfoot and Nessie, the Loch Ness Monster. In other words, no matter what it says, most folks are likely to label it as lunacy.
There is no good way out of the soybean quagmire for USDA. Even if yield is trimmed only to the expected 37.2 bpa, a figure that if realized would officially make soybeans the cockroach of the oilseed world, and demand is left unchanged from July, ending stocks for 2012-2013 would still be in negative territory. In order to come in at the projected 115 mb, total demand would need to be reduced another 260 mb.
Domestic crushing will take up some of the slack, but that category has already been reduced 65 mb from 2011-2012. That leaves exports. Yes, exports could get carved away on paper, but the reality is who will provide China with the supplies it needs? Remember, South America is also dealing with a drought-reduced crop, meaning by the time next year's crops are available, global ending stocks could be near zero.
Global numbers will likely take center stage in wheat given all the talk of reduced production due to a myriad of weather-related problems in most of the key growing areas of the world. Canadian and Australian production could be increased while EU, Russian and Black Sea region numbers come down. The end result, when added to the expected slight decrease in the U.S. (2.220 bb as opposed to the 2.224 bb in July), could take global ending stocks-to-use back to almost 26%.
Domestically, given the expected production estimates, total demand would be expected to increase about 230 mb to hit the ending stocks projection of 681 mb. If realized, this would drop ending stocks-to-use to 28.6%, the tightest since the end of the 2007-2008 marketing year.
WHAT THE MARKET THINKS
Heading into the report, the forward curves for corn and soybeans are inverted, indicating a long-term bullish view of fundamentals. It has been argued that in corn this reflects the tight supply situation, but once demand destruction kicks in, it could quickly evaporate. Regardless, the August report estimates seem to be slightly less bullish than what is indicated by the futures spreads. A similar situation exists in soybeans where the strength of the inverse would imply domestic ending stocks closer to zero than 100 mb. Wheat spreads would also seem to be more bullish than what pre-report estimates would indicate.
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Posted with DTN Permission by Haylie Shipp