Look For Fine Tuning Of Numbers


Usually the November round of USDA crop production and supply and demand reports lack fireworks. The intrigue this year could be in the fine tuning as large changes aren't expected either domestically or globally. Judging by market action in October, the biggest surprise could come in wheat with ending stocks numbers possibly coming in larger than expected. 

Corn: Pre-report estimates are indicating the corn numbers could be mildly entertaining in the November crop production and supply and demand reports. The average for ending stocks estimates came in at 635 million bushels, up 16 mb from USDA's October despite an estimated production decrease of 77 mb. That implies an almost 100 mb dip in demand. Taking that category apart, export shipments are on slightly behind the three year average pace, indicating a possible decrease of 20 mb to 25 mb; cattle spreads remain neutral to bearish, meaning feed demand could come in at 4.15 billion bushel again if not higher offsetting potential losses in exports. This leaves ethanol demand, which could fall from the 4.5 bb seen in the last two reports. Another possibility is beginning stocks (2011-2012 ending stocks) could regain some of the 193 mb trim it took in October. As for harvested acres, pre-report estimates are indicating a slight decrease to 87.1 ma from the October 87.7 ma.

Soybeans: U.S. ending stocks are expected to bump up by about 3 mb, due in large part to a 31 mb increase in estimated production stemming from a slightly better national average yield and unchanged harvested acres (75.7 million acres). If so, this would prove USDA truly has magical power to hold domestic ending stocks above 100 mb given export shipments are running almost 10{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} ahead of average pace, implying a demand projection of about 1.39 bb. Either that or USDA is expecting demand to fall to near zero once South American harvest begins next spring.

Globally, only minor changes are expected in production and ending stocks until more is known about South American crops. However, early conditions in both Argentina and Brazil have many market soothsayers scratching their heads about continued projections for record production.

Wheat: Polled analysts had a devil of a time with wheat, with the average pre-report domestic ending stocks estimate coming in at 666 mb. If realized, it would not only play on the fears of the few remaining believers of the end of times (think Mayans), but also be an increase of a modest 12 mb from the October report. While this seems minor, it flies in the face of convention that tightening global supplies would lead to an increase in export demand for U.S. stocks. That hasn't been the case with total export shipments running at least 7{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} behind the three-year average. If this pace is maintained it would imply demand falling to about 1.07 bb.

What the market thinks:Over the course of October, the December 2012 to March 2013 corn spread saw its slight carry weaken by 2 cents, indicating the market holds a slightly more bullish view of supply and demand. This would seem to fit in with the idea of smaller domestic production and possibly a slight decrease in global ending stocks. But it also seems counter to the expected modest increase in domestic ending stocks, though the figure discussed above would still project an ending stocks-to-use ratio of only 5.7{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05}.

While 2012-2013 soybean forward curve (series of futures spreads from November contract through July contract) remains bullish, the November-to-January spread saw little change over the month of October. This would seem to be in agreement with pre-report estimates of little to no change in domestic or global ending stocks until more is known about the South American crop situation. Also, it indicates the market is not anticipating a substantial increase in export demand despite the strong early pace.

The carry in the Chicago December 2012 to March 2013 wheat spread strengthened significantly (5 cents) in October, indicating the market does not share the conviction that export demand is going to pick up for U.S. supplies. It also implies that pre-report estimates may be underestimating increases in domestic ending stocks or that global ending stocks could also be ratcheted up higher than expected.

Source: DTN

Posted by Northern Ag Network

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