Unusually extreme uncertainty surrounds key crop report


It was hardly surprising that many investors viewed the approach of a key crop report on Monday as cause to take profit on short positions, pulling crop prices - temporarily - out of their downswing.

"This is going to be a big report," Dustin Johnson at Illinois-based broker said.

Not only is the US Department of Agriculture's August crop report the first of the season in which corn data will be based on field observations, rather than spreadsheet assumptions and weather.

It will also contain the extra uncertainty this year of the results of a resurveying of soybean sowings, after the delayed pace of the spring planting season meant that the USDA survey undertaken in early June was likely not as accurate as it usually is.

Wide range of guesses

The varying opinions over the impact of such uncertainties - above the usual vagaries associated with attempting to guess how the USDA will respond to the mass of data on factors from rainfall to exports over the month since the previous report – have led to an unusually high degree of variation in market forecasts.

Market expectations for Wasde corn estimates, (current USDA figure)

US yield: 158.0 bushels per acre, (156.5 bushels per acre)

Range of estimates:155.1-161.2 bushels per acre

US stocks, end 2013-14: 2.013bn bushels, (1.959bn bushels)

Range of estimates:1.498bn-2.367bn bushels

World stocks, end 2013-14: 152.36m tonnes, (150.97m tonnes)

Range of estimates:148.0m-159.0m tonnes

Sources: USDA, Bloomberg
Take the figure on US soybean stocks at the close of 2013-14, expected to prove one of the key numbers in Monday's report.

Analyst estimates for the number range from 131m bushels - which would be undeniably tight, and likely warrant a rebound in prices - to 325m bushels, up 30m bushels from the  USDA's existing estimate, and supportive of last month's tumble in futures.

And it's easy to see how such a variety of opinions has developed.

'Large acreage swap'

Take the soybean plantings number.

Mr Johnson sees this leading to a raised estimate for soybean plantings, given that late-planting years typically see a swing in sowings to the oilseed, which can be later seeded than corn.

"It wouldn't be surprising to see large acreage swap from corn to soybeans on a late planting year like this," he told Agrimoney.com.

"It might be that we end up with corn acres seeing a 1m-acre decrease, and soybeans gaining 1m acres."

(That said, the corn planted acreage number is not expected to be adjusted this time – although more on that later.)

Wheat knock-on effect

However, at Allendale, chief strategist Rich Nelson forecast a drop in the soybean seedings figure.

"It is because of the level of double crop soybeans," sown on land cleared by the winter wheat harvest, and which was expected to account for an unusually large 10% of overall plantings of the oilseed this year, thanks to high prices.

"Because of the lateness of the winter wheat harvest, it is likely that not all these soybeans went in," Mr Nelson said.

Yield upgrade?

And this before even getting to the more conventionally debated variables of supply and demand, notably the yield.

Market expectations for Wasde soy estimates, (current USDA figure)

US yield: 43.7 bushels per acre, (44.5 bushels per acre)

Range of estimates:42.5-44.5 bushels per acre

US stocks, end 2013-14: 262m bushels, (295m bushels)

Range of estimates:131m-325m bushels

World stocks, end 2013-14: 74.39m tonnes, (74.12m tonnes)

Range of estimates:72.5m-76.0m tonnes

Sources: USDA, Bloomberg
"There is a 50:50 chance that the USDA raises the soybean yield number," said Christopher Narayanan at Societe Generale.

"Weather looks positive heading into the pod-setting phase," the sensitive period for soybeans, although he acknowledged that USDA scouts "might want to get into the field" before making any changes.

On demand, Mr Johnson flagged the potential for a cut to the USDA estimate for Chinese soybean imports in 2013-14, despite Thursday's figure showing record buy-ins last month.

"A lot of people in the private sector believe a rise of 10m tonnes looks too optimistic," he said.

Corn spread

For corn, there is an unusually large variation too in analyst estimates for the number that the USDA will produce for end-2013-14 stocks.

The range of forecasts stretches from a little under 1.5bn bushels to 2.37bn bushels.

Again the acreage figure is in question - not so much on the figure for plantings, which analysts see unlikely to change, but the harvested area.

"On that, there is a history of the USDA adjusting estimates in August," Jerry Gidel, chief feed grains analyst at Chicago-based broker Rice Dairy, said.

"You may get some adjustment to account for the crop that farmers have taken insurance on already. We anticipate both corn and soybean harvested area will be cut."

A reduction is a "definite possibility", Allendale's Rich Nelson said, adding that "only in six of the last 20 years has the USDA in August changed planted acres".

Yield dispute

And that is before getting to the yield, for which a gap in opinion has emerged too, with Allendale foreseeing a slight drop, of 0.3 bushels per acre, in the USDA number, to 156.2 bushels per acre, while the likes of Goldman Sachs have been spouting estimates as high as 161 bushels per acre.

Market forecasts for Wasde wheat estimates, (current USDA figure)

US harvest: 2.12bn bushels, (2.114bn bushels)

Range of estimates:2.079bn-2.15bn bushels

Includes winter wheat: 1.545bn bushels, (1.543bn bushels)

US stocks, end 2013-14: 579m bushels, (576m bushels)

Range of estimates:509m-653m bushels

World stocks, end 2013-14: 171.1m tonnes, (172.38m tonnes)

Range of estimates:168.0m-174.0m tonnes

Sources: USDA, Bloomberg
Over 90m acres or so, that gap makes quite a difference.

"For once, I would not disagree with Goldman Sachs over the potential for hitting that number," Mr Nelson told Agrimoney.com.

"But the Wasde number is as of August 1," after a July which had seen low precipitation, if with cool temperatures too to stem concerns over moisture shortages for all but small sections of the western Corn Belt.

Mr Gidel said: "Some people come up with figures where they think the crop will end up at the end of the season, rather than what they think the USDA will come out with on Monday.

"Which is fine, except that it is the report which will set the scene for prices on Monday and in the immediate aftermath."

Cheaper feed

Demand could present some uncertainties too, given the drop of 13% in new crop corn prices, and of some 8% in new crop soybeans, since the July Wasde report.

"It will be interesting to see whether the USDA expects to see a resurgence in demand at these lower prices," Mr Narayanan said.

"Pork and poultry producers are definitely making better margins," likely fostering expansion and a rise in feed needs.

Lesson from history

So, with such a spread of opinions this time, how should investors position?

If the sensible approach is to take some profits on short positions, there is another guide to what investors should expect, from history.

"It is interesting to note that USDA August corn production has exceeded the average trade guess in seven of last nine years," by 100m-300m bushels, Richard Feltes at RJ O'Brien said.

"Conversely, the USDA August soybean production estimate has fallen short of trade expectations in 11 of the last 12 years.

"The take home point here is that history says the USDA's August corn production estimate is likely to exceed expectations, potentially by a wide margin," potentially pushing the estimate for end-2013-14 corn stocks "well over 2.0bn bushels".

'Finds its demand level'

That would suggest that short positions hold some potential profits yet.

After all, as Jerry Gidel noted: "Given the current substantial US corn crop in the field and the sizable Ukrainian and Brazilian crops also being available to buyers this coming year, this year's US harvest prices probably will remain under pressure until corn finds its demand level".

And that "appears to be in the $4.00-4.30-a-bushel range" for December futures.