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USDA crop report contains surprises

Over the last few years, market prices haven't been kind to producers. Described by market experts as “exciting,” “amazing,” and “shocking,” the Aug. 12 USDA crop report may help change that.

“It would be an understatement to say this is the crop report of the last decade. It's certainly the most exciting report since 1993,” says Rich Feltes, vice president and director of commodity research at Refco, Inc.

Here are some reasons why:

  • The USDA estimate for this year's soybean crop is 2.628 billion bushels. The smallest crop since 1996, USDA projects soybeans at 262 million bushels less than the 2001 crop. The new ending stocks estimate is 155 million bushels.

  • The estimate for corn is 8.886 billion bushels — almost 200 million fewer bushels than the average trade guess. The number is the lowest in 7 years and is 13 bushels lower than last year's yield. The smaller production figure is due to a harvested acreage total of just 71 million acres at a national average of 125.2 bushels per acre. The ending stocks estimate for corn is 767 million bushels.

  • For wheat, the ending stock estimate is 467 million bushels.

  • Global grain stocks are down from their high of 394 million metric tons (which was the high water mark of 1998-99) to 274 million metric tons.

Feltes says this is the largest decline in harvested corn acres from July to August since 1993. “We've lost 1.1 million corn acres… and the prospect for additional declines in corn production — particularly after viewing weather forecasts — suggest less-than-optimal situations in Illinois and Ohio and potential further declines.”

Those who bet this report would mark the high point in prices were clearly wrong. USDA, in its adjustments, has raised the on-farm bean price $1. The agency raised the corn price 50 cents per bushel and wheat 45 cents per bushel. Feltes says all these crops will be in a bidding war for acres next year.

“In terms of the most exciting commodities, corn is at the top and could be flirting with a limit trade.

“In this report, USDA suggests we'll have to ration soybean usage substantially from last year. If you look at history, the last time we had to ration this many beans was in 1993-94, when there were terrible floods. At that time, we had an average on-farm bean price of $6.40 per bushel.”

In terms of the market psyche, Feltes thinks people were looking for this report to, “overstate trade expectations. That is typically the case in stress years. The crop numbers, across the board, have come in below trade expectations and the fear now is we'll have additional declines as we have in other stress years.”

In the last seven years, the average change from the August report to the final crop report for corn is 350 million bushels. In soybeans that number is 90 million bushels. But this isn't a normal year — the country has the lowest crop condition ratings since 1988.

“Again, I can't underscore the point enough that August weather can still auger very crucially on crops. From what we're seeing though, it appears the western Corn Belt conditions will improve while the eastern Corn Belt will deteriorate.”

The latest USDA report is very positive for Chicago Board of Trade (CBOT) volume and volatility. “We're going to wind the rubber band pretty tight and it'll take some time to unwind it,” says Feltes.

In reviewing the crop report, one thing that stands out to Brian Basting — beyond the low crop production numbers — is relating the new numbers to demand. In looking at demand for corn last year, the number was approximately 9.8 billion bushels.

“This year, the government is forecasting demand at just under 8.9 billion bushels. There's a discrepancy of about 900 million bushels there,” says Basting, an analyst at Advanced Trading, Inc.

“In looking at soybeans, we used about 2.95 billion bushels this year and the coming crop is only estimated at 2.628 billion bushels. That's a discrepancy of about 325 million bushels,” says Basting.

The last few years, the market has been reaching a low level to clear usage. Now, the markets will be in a position where they'll have to take usage — which has been record high — and ration the usage back.

“The thing is — particularly in looking at the domestic use of corn — that can be a difficult task. Thus far, the market hasn't kicked in a tremendous amount of rationing in the feed sector. We are hearing some rumblings, but no wholesale liquidations of cattle herds. That will evolve over time,” says Basting.

On crop size, Basting thinks the soybean numbers particularly are still in flux. August rains are critical and the market will be watching the weather patterns very closely. “We need the South American soybean crops this year, and the market will be very sensitive to that. Just to keep the balance sheet where it is today, we need about 48 million tons out of Brazil and 30 million tons out of Argentina. We need a big crop out of South America. I can't underscore the demand patterns we've seen in both corn and beans. The pendulum has swung the other way, and our crop size is insufficient to meet demand.”

The market that shapes up shortly will be a big switch from that seen the last couple of years — both for the producer and end-user. The market has gotten used to a situation where supply has been ample to meet demand. That equation has been flipped around entirely.

“We're now in a situation where the U.S. crops are substantially — not just a little bit but substantially — below the usage levels of the last couple of years. Now, the market must go into a phase where there are some cutbacks in usage. The whole mentality of the market will change, and the first indication of that will be seen when the market attempts to insure the crops make it through the crop year in usage, to take down the corn feeding and encourage soybean acreage in South America,” says Basting.

USDA indicates that soybean usage needs to fall 172 million bushels versus last year. “We haven't had a usage cut of that nature since the mid-1990s and we clearly don't have a price yet to get such a draw down in usage,” says Feltes.

In terms of producer marketing, Basting says this report spells a new challenge. “The last several years have been characterized by producers taking big LDPs at harvest, storing their grain and selling the carry or holding grain and waiting for price appreciation. After this, there won't be any LDPs and, at least historically, the highest grain prices in a short crop year are early in the marketing year. Short crops have long tails and sometimes the best prices are in the fall. We could do what's needed in price rationing over the next three months. Producers should be aware, alert and ready to sell not only old crop but also new crop grain as the market reacts to this shocking news. I think this is very exciting for our industry.”

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