USDA corn numbers don’t lie! Or do they?

Grain Brokers Australia, August 20, 2019

GLOBAL grain markets were rocked last week when the United States Department of Agriculture (USDA) amended this season’s US corn production estimates, printing yield and area numbers much higher than the trade had expected.

The latest monthly World Agricultural Supply and Demand Estimates (WASDE) report was released last Monday.

The report was generally expected to have a few surprises and an increase in corn production was the complete antithesis to industry-wide projections.

The USDA decreased the corn area by a meagre 690,000 hectares to 36.42 million hectares (Mha). This area was far higher than the average trade estimate of 35.5Mha.

The higher-than-expected area was a big surprise, but not as big as the increase in yield from 10.42t/ha to 10.64t/ha.

It is widely accepted that the corn crop was planted under less-than-optimal conditions, and it has not been a walk in the park for the developing crop since planting. If that is the case, it is difficult to swallow a projected yield that is only 4.5 per cent below the long-term average.

The net effect of the USDA changes was an increase in total corn production from 352.4 million tonnes (Mt) to 353.1Mt, when the average trade estimate had total production decreasing to 335.1Mt.

Consequently, many don’t believe the USDA numbers and are expecting gradual downward revisions in coming months.

Maybe the Market Facilitation Program, designed to assist farmers affected by tariffs and reduced exports, provided a bigger-than-necessary incentive for farmers to plant regardless of the chances of crop success. But the prevent-plant numbers, also released early last week, do not support that notion.

US farmers reported they were not able to plant crops on more than 7.9MHa this year. This is the highest prevent-plant area reported since the Farm Service Agency (FSA) began releasing its report in 2007.

It is also 7.08MHa more than was reported at the same time last year.

There is a saying that says numbers don’t lie, but these don’t seem to make sense.

Corn made up more than 58pc of the prevent-plant area, or 4.53Mha. If you add that to the latest WASDE seeded area, it comes to a total of 40.95Mha.

This is 9pc higher than the 37.55Mha the USDA expected farmers to allocate to corn production in their May update, before the seeding program commenced. It is also be more than 5Mha above the previous record corn area.

US corn futures took a shellacking as soon as the WASDE report was released. The nearby contract was very quickly limit down (25 cents per bushel) and, despite a small rally on Friday, was down 8.8pc across the week.

That represents the biggest weekly fall since June 2016.

The market has essentially fallen back to early May values, but production has fallen 29Mt and ending stocks are down by almost 8Mt over the same period.

Rough for speculators

The speculators in the corn market have had a rough time.

They had a significant short position at the beginning of May. They lost money when the market rallied as planting conditions rapidly deteriorated. They spun around and went long only to get stopped out last week back near contract lows.

Where to from here?

The market has lost around 100 cents per bushel in the past eight weeks.

Maybe it has done enough for now.

With substantial scepticism around the high USDA numbers, the final disposition of the corn crop and the weather from here through to harvest, it would seem logical that a modest risk premium would be justified.

Less wheat

Wheat took a back seat to corn in the aftermath of last week’s WASDE report, but there were some significant revisions to global production.

The production declines were led by Turkey, where a lower harvested area and poor yields led to a 2Mt reduction in output.

The USDA trimmed production in the European Union by only 1.3Mt to 150Mt, with the dry, sweltering June conditions having a much smaller impact than had initially been anticipated.

In the Black Sea region, Russian production was lowered by 1.2Mt to 73Mt, a far cry from the 80Mt being spruiked just a few months ago. The Kazakhstan wheat crop was reduced by 1Mt to 13Mt, but Ukraine bucked the regional trend with a 200,000t increase in production.

The picture in the Americas was positive, with US production increased by 1.6Mt to 53.9MT.

In Argentina, the season continues to improve with another upward revision of 500,000t to 20.5Mt.

Nevertheless, this is lower than the most recent Buenos Aires Grain Exchange estimate of 21.5Mt.

Australian production was left unchanged at 21Mt.

Rainfall across much of the Western Australian, South Australian and Victorian production areas in the first half of August is keeping the crop ticking along, but we still need more rain and a kind spring to avoid a downward revision to production before harvest.

The overall impact of the revisions to global wheat production was a decrease of 3.4Mt from 771.5Mt to 768.1Mt. The key point here is that despite the decline, global production is still up by 37.5Mt year-on-year, carry-out is healthy at 285.4Mt, and the stocks-to-use ratio of 37.6 per cent is running at a historically high level.

This article was written by Grain Brokers Australia.

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