The USDA’s July Crop report was bearish grain and supportive soy. Soybeans should gain on corn and soybeans should gain on wheat in the weeks ahead. CBOT soybeans rebounded at the close, but there was a limited bounce in grains.
With the utmost respect to WASDE, it all comes down to US yield/production! US crops are made or broken during the next 6 weeks. July makes corn crops and August soybeans. The graphic at left reflects the EU model Ensemble forecast for a strong high pressure Ridge across the Central US next Wednesday. The EU Ensemble model holds the crown as being the most reliable and accurate. If heat/dryness continues to spread south and east from the N Plains with time, CBOT prices will head sharply higher. The rally will be led by beans!
In the grains, the USDA data argues for lower prices in everything but HRS/durum wheat. Our market stance is to use corn/Chi wheat rallies to make longer term sales.
As expected, the July WASDE report offered very few changes to the supply/demand outlooks in either the old or new crop balance sheets. In the old crop outlook, the USDA lowered their estimate for annual crush by 10 Mil Bu to 1,900 million, while annual exports were raised by 50 Mil Bu to 2,100 million. The net result was a 40 Mil Bu decline in 2016/17 ending stocks. In the new crop balance sheet, planted acres and yield were unchanged from June, while harvested area and production increased fractionally. No other changes were offered in the new crop outlook, and the lower carry in total lowered the new crop stocks projection by 35 Mil Bu to 460 million. The season average price forecast was increased by $.10 to $8.40-10.40. Chicago soy market’s slumped following the report release, with market focus back on weather and overnight rains that fell across the Midwest.
Changes to the soy product markets were mostly limited to production changes from the lower old crop crush rate. Both domestic and export use for old crop meal were slightly reduced, and no changes were made to the new crop meal balance sheet. In the soyoil estimates, the USDA made the first change to biodiesel demand since last November, as the usage rate through April continued to reflect slower than expected demand. The annual forecast was lowered by 200 Mil Lbs to 6,000 million. The chart plots the history of the July WASDE biodiesel demand forecast against, the actual annual total. Since the EIA biodiesel report resumed in 2012, the July WASDE has underestimated annual biodiesel demand in 3 out of 4 years, but on average has been within 2% of the annual total. A year ago, the July WASDE was too low by 4% as demand accelerated late in the year in anticipation of the Blenders Credit expiration.
Monday’s chart gap held through post report trading, and we look to be scale up sellers on a further rally.
The USDA’s old and new crop corn changes are, on the margin, bearish. Old crop feed consumption was reduced 50 Mil Bu, old and new crop stocks were raised, though ARC does mention that today’s changes simply reflect data from NASS’s June stocks and seedings reports. Otherwise, as expected, yield was left untouched, and not just in the US but across the Northern Hemisphere. ARC has no major disagreements with the USDA’s demand numbers – and in fact our export estimate is much lower – but over the next 45-60 days it’s all about supply, and future WASDE reports are fully expected to include reduced yield in the US and Ukraine. Already we’ve raised our projected abandonment a bit, and estimate national yield at 166 Bu/Acre, which is just 2% below the 30-year trend. Our work further indicates 17/18 US corn end stocks will be much closer to 2.0 Bil Bu.
The US weather forecast today is slightly cooler in the 12-15 day period, but otherwise unchanged, and further drought expansion will be established in the next two weeks across the Plains and Western Midwest.
The USDA lifted old crop world end stocks 3 MMTs to a record 227.5 MMTs. Higher carryin supplies spilled into the new crop global balance sheet, and new crop stocks were raised 6.5 MMTs to 200.8 MMTs. The change in major exporter stocks/use is at left, and with new crop major exporter stocks/use near unchanged on the year, funds were willing sellers. However, the majority of this change is a function of higher US stocks, while other major exporting balance sheets were left alone. The point is that the USDA’s July WASDE did not include any new market insights, and changes lie ahead in the US & Black Sea especially. We advise against chasing any further break, as a major US weather pattern shift is not yet indicated.
The USDA’s US wheat balance sheet also accounted for NASS’s stocks and seedings data, namely higher old crop stocks & lower new crop harvested area. New crop yield was also cut 1.1 Bu/Acre, as spring wheat losses more than offset modest gains in winter wheat. The loss of supply, and also recent changes in global price relationships, triggered a 25 Mil Bu cut in exports. Today’s changes are viewed as bearish, as 17/18 stocks grew 14 Mil Bu in spite of lower production, and also as Russia’s crop was raised 3 MMTs to a near-record 72 MMTs (vs. last year’s 72.5). Like corn, ARC is in agreement with the demand side of the USDA’s balance sheet, but we fully expect spring wheat production to be cut another 30-40 Mil Bu in NASS’s August release. End stocks will exist at/above 900 Mil Bu, but lower protein wheat will account for a massive amount of this.
US wheat end stocks by class are displayed below. The USDA projects HRS stocks to fall to a decade-low 122 Mil Bu, while SRW stocks will be a record 236 Mil Bu, or some 30% of total US wheat end stocks, vs. just 18% a year ago. Durum stocks are pegged at 26 Mil Bu, down 10 Mil (33%) from last year. Our work suggests higher protein wheat inventories will decline further in subsequent reports, and that lower protein supplies will increase. ARC forecasts combined durum/HRS stocks at just 114 Mil Bu, vs. the USDA’s 148 Mil and vs. 271 Mil a year ago. The US wheat balance sheet, as a whole, is somewhat misleading, and we doubt that the SRW will balance sheet will be a major driver of US prices. The US in 2017 will have too much lower quality wheat, but not enough high quality. Note that NASS did not even address spring wheat abandonment, and instead left harvested area unchanged from its June acreage report.
2016/17 world wheat stocks were raised yet again – which has been the case in nearly every WASDE report over the last 12 months – while new crop stocks were lowered slightly. Russian production was raised as mentioned previously; combined production in Ukraine, Europe and Australia was reduced 3.25 MMTs. New crop major exporter stocks/use was lowered slightly, and ARC anticipates further reductions in the Aug and Sep reports. Canadian and Australian weather is becoming a big problem, and ARC’s work in Canada suggests their crop is closer to 25 MMTs, vs. the USDA’s 28.3. There’s talk of an Aussie harvest near 20 MMTs, vs. the USDA’s 23.5. We maintain that major exporter production will be down roughl 40 MMTs from last year, which will offer strong suppport above $5.00, basis Sep CME. And quality is a significant concern amid N American spring wheat yield loss and ongoing unwanted rainfall in N Europe and C Russia.
