Weather Likely to Trump Wednesday USDA Reports


by Darin Newsom, DTN Senior Analyst

OMAHA (DTN) — A couple of issues to address before we get into the heart of the preview: 1) This is all about weather, and how much USDA has accounted for conditions when it comes to crop production. 2) And I’m sorry all of you wheat, cotton and grain sorghum growers; the bulk of the attention (roughly 99.9{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107}) will be paid to domestic corn and soybean numbers. That’s just how it is this time around.


If ever there was an opportunity for traders to completely disregard USDA’s crop production guesses, the July 2012 report could be the time. This isn’t a discredit to USDA (at least not any more so than usual), but the fact is its hands are tied and it is stuck using data as of the end of June 2012. With talk circulating that the corn crop is losing 5{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} of its production potential every day it remains hot and dry, the situation is likely far different from what USDA saw at the end of the month.

Pre-report estimates have national average corn yield at 154.1 bushels per acre as compared to the 166 bpa estimate released in May and upheld in June. The 154.1 bpa estimate is 10 bpa, or 6{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107}, below trendline yield of 164 bpa released in February. Most would agree that this number is laughable. There is more talk of a 1988 situation where national average yield came in about 30{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} below trendline. If this does happen in 2012, national average yield would eventually come in at about 113 bpa. USDA’s own NASS department continues to release weekly crop condition numbers indicating the crop is about 38{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} below normal, though USDA doesn’t use these numbers in its crop production tabulations.

Here’s the game, though: Pre-report estimates are not projecting what corn might actually yield when all is said and done, but what USDA might release in its report. As I’ve said many times over the years, it is nothing more than a high-stakes game of pin-the-tail-on-the-donkey. USDA can’t drop yield as far as might be projected by others for fear of setting chaos off in the market.

Ending stocks are projected at 1.232 billion bushels, well off the 1.881 bb projected in both May and June. Accounting for a lower beginning stocks figure of 840 million bushels (down from the June estimate of 851 mb, but still well above DTN’s projection of 745 mb), and if we use the 154.1 bpa, putting production at 13.7 bb, either demand or total supplies will have to be changed by about 455 mb. Demand is expected to come down, particularly in the feed and ethanol categories. But imported supplies could also see a substantial increase from the somewhat standard 15 mb.

The bottom line is this: Even at a possibly inflated 154.1 bpa, ending stocks-to-use could fall back below 10{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} as compared to the 13.7{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} projected in the June report. Imagine what could be made of the situation if yield ultimately drops below 150 bpa, or 140 bpa or even lower.

The market seems to be of the opinion that the situation is far tighter than what USDA will release. The forward curve of the market (series of futures spreads from September 2012 through July 2013) shows the nearby spread inverted, with only a small carry through the deferreds. In other words, commercial traders are concerned about having adequate supplies later in the marketing year.


As tight as corn is expected to be, domestic soybeans are expected to be even tighter. Pre-report estimates have pegged national average yield at 42.3 bpa, down from the 43.9 bpa released in May and June. Using the slight adjustment of 2011-2012 ending stocks (2012-2013 beginning stocks) down to 170 mb, and again the standard imports of 15 mb, total supplies would be calculated at roughly 3.356 bb. (A side note: Given the June 29 quarterly stocks number and subtracting average demand for Q4, ending stocks would be closer to 200 mb.)

The pre-report estimate for 2012-2013 ending stocks came in at about 134 mb, down from the June number of 140 mb. If realized, this would whittle ending stocks-to-use down another 0.1{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} from its projected historically small level of 4.3{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} in June. But much like corn, the idea that national average yield may only be 4{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} below trendline of 44 bpa may not be believable, particularly by those once again using NASS weekly crop condition numbers.

Through June, accounting for the same timeframe as USDA, weekly crop condition numbers were about 62{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} of normal, indicating that the crop could be trailing trendline by a much larger margin. For those comparing to 1988, that year saw national average soybean yield come in at approximately 78{6b02cb02835b82b7f756ddf6717aaab7139b350de274ea97f5b53eb230607107} of trendline. Such a scenario in 2012 would result in a national average yield near 34 bpa. In reality, that number will never be released by USDA this year unless demand categories are done away with completely.

Given the pre-report estimates we have at this point, demand would have to fall by 33 mb to achieve the 134 mb ending stocks projection. That is unless imports are increased, and frankly, with the tight supply situation in South America following this past winter’s drought in Brazil and Argentina, where would the beans be imported from?

The market is implying it doesn’t know how USDA will keep ending stocks above the unofficial floor of 100 mb, nor does it care. The forward curve is in a strengthening inverse, indicating a long-term concern over supplies at a time when global demand is expected to increase once again. Even if South American production is increased for 2012-2013 from the June estimates of 78 million metric tons for Brazil and 55 mmt for Argentina, the timeframe from September through February would see what could be a historically tight global situation.


The weakening of the carry in the Chicago futures spreads reflects a more bullish commercial view toward the global wheat situation as well. While pre-report estimates have winter wheat production increasing by almost 20 mb and 2012-2013 ending stocks growing by almost 30 mb, the market is saying those numbers could be overstated. Eventually, it would not be surprising to see both the domestic and global wheat situations tighten, particularly if feed and export demand in the U.S. is increased.


© Copyright 2012 DTN/The Progressive Farmer, A Telvent Brand. All rights reserved.

Posted with DTN Permission by Haylie Shipp


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