Sunday, March 31, 2013

USDA Report Game Changer - Sticker Shock

Last week Thursday the USDA threw a big curve ball for all of the bulls out there.  With March 1 stock numbers well above trade estimates for both corn and soybeans.  I am sure everyone has seen the numbers so I won't dwell on that.

Rather what does it mean for prices going forward and what are some possible theories on the USDA logic?  First off prices going forward should stay under pressure or really show us the small crop long trail theory.  Most balance sheet estimates that I have seen for corn are now between 800-1.0 billion bushels.  After all the USDA found nearly 400 million bushels more in the stocks then the trade estimates.  Before this last report the old crop corn carryout was pegged at 632 million bushels and if most of the estimates had that pegged as an ending carryout number or close to that as an ending carryout number then now naturally some estimates might be up to the billion bushel mark.

Is it possible that the USDA doesn't increase our carryout by the trade estimate miss.........yes and history has shown us where the USDA sometimes has some logic; but typically this has been on the September stocks report and the logic was the use of new crop harvested bushels.

First logical thing that comes to mind is that the USDA just under estimated the crop size.  But here is a long shot for the bulls out there.  Keep in mind that even though our number this last week was 400 million bushels above estimates it was also 600 million bushels below last year.  What happened in last year's 3rd and 4th quarter for usage?  It wasn't exactly helped out by the strong basis and then it wasn't helped out further by the run up to nearly 8.50 either.

Was there end users that last year in June-August that shut down and really didn't start up because of the drought?  Ethanol or feed guys that couldn't make it work with the negative margins and strong basis that got handed a drought card on top of it that really slowed down usage and allowed us to keep a carryout near a billion bushels?

What could be different about this year or what could be a reason for the USDA not to be nearly as aggressive on carryout cuts as most area already pricing in?  First off perhaps some of the demand that we curbed 8-12 months ago was the weak demand; perhaps that guys left out there buying are strong hands?  Secondly as it stands today we have more demand coming back in via a bigger crop then last year's drought yield shorten crop.

So now we have a stage that we have a major price break on old crop and ideas of a huge new crop supply.  If end users can buy old crop profitably and new crop with even more profits what have we done for our demand?  In theory we haven't hurt it and perhaps just perhaps we have stages set that tell every end user out there to hang on.  If that is the case is it possible that the USDA doesn't increase our carryout nearly as much as estimates have???

Bottom line is the stocks number was a major surprise to the trade but would it have been a surprise to the USDA?  That my friends we really don't know.

We do know that if the carryout numbers increase like the trade has estimated that longer term we now have to find a lot of demand especially given the planting intentions.  Last year we had to curb more demand then ever; but it is now very possible that we will have to find more demand then ever; perhaps more then we even curbed.

I thought after the USDA's March Supply and Demand Crop Report that perhaps the reason the USDA increased feed/residual demand was the fact that things are so tight that they couldn't afford a massive price drop that would increase any demand.  That might also be another reason for us to not see the huge carryout numbers on the USDA's April Supply and Demand Crop Report despite the worst miss ever on the stock's report.

Overall don't take the above comments as super bullish; more balanced.  As overall the headlines have turned negative and the most likely outcome isn't for a balance sheet to stay super tight; but rather a balance sheet that isn't nearly as tight as it has been.  The above reasons or possible theories might be a reason to cover up short call options or holding a small amount of grain for the home run.  But odd's for anything other then a balance sheet with a huge carryout increase are not good.  Possible that the USDA has another theory; but nothing to exactly make a big wager on.

As for what to do as we go forward; first is to realize that if the report was really a game changer that most all rallies should be rewarded with some sales.  Most will say that since September one should have been selling the rallies and looking back that is more then true; but that might also mean that  could see a near term bottom sooner then later.  This report basically has everyone bearish right now.

Last time corn seen a move like this was the June 2011 stocks report when the July contract which had no limits traded down 69 cents; very close to the type of move the synthetics indicated the move was on Thursday...........It's important to note that was the lows for that move.  Does that mean that this thing could make it's lows Sunday night or Monday?  No it doesn't mean it will shake out that way but it could.

1 comment:

  1. Definitely agree with what you stated. Your explanation was certainly the easiest to understand. I tell you, I usually get irked when folks discuss issues that they plainly do not know about. You managed to hit the nail right on the head and explained out everything without complication. Maybe, people can take a signal. Will likely be back to get more. commodity trail