USDA Feb Supply and Demand
This was a big yawner. They made very little changes from the Jan report and if you look down the column at the actual numbers compared to expectations, you would not believe how strong the market traded yesterday after the report. We saw weakness Tuesday in positioning ahead of the report and then strength on Wednesday before the report. When the numbers came out, the market dipped but did not last long. It quickly came roaring back. USDA made no changes on the US corn crop, only raised crush by 25 million bushels on the bean crop and raised wheat carryout by 20 million bushels. Several prominent commentators called this absurd as they believe USDA is too low on corn use for feed, ethanol and exports and for beans, still too low on crush and exports. Time will tell.
USDA was expected to be conservative in making cuts to the South American crops. They are always more conservative than the private analysts adopting a wait and see approach to foreign production estimates. USDA still has South American production higher than what the market was anticipating.
I think the best explanation for the market’s reaction is just disbelief. I think the market dismissed USDA’s report as soon as it was released. The market closed at new highs on Wednesday.
Markets jumped higher again Wednesday night and then CONAB released their updated estimates at 7 am this morning. Their number was a doozy. They estimated Brazilian soy production at 125.5 million metric tons (8.5mmt lower than USDA and 17.3mmt lower than their last estimate, that is 312 million bushels and 635 million bushels respectively!!). They only lowered their corn production by 0.6 mmt from their last estimate (but still 1.7 mmt less than USDA). This begs the question how there could be such damage in the bean crop but not in the corn crop but we will leave that for another discussion. It is being widely reported that CONAB is under a lot of political pressure to get accurate crop forecasts rather than just waiting for harvest data.
Soybeans were sharply higher after the CONAB data and were finally able to break through $16. It took corn a little longer but it was able to follow making new highs itself.
Weather leans bullish with areas that are too wet in Northern Brazil while the parched Southern Brazil stays dry. Models still do not agree on the Argentine forecast but it is generally dry.
Soybeans and corn both hung around the highs for a while but then late session selling pressure turned the tide on corn soybeans and wheat. We had massive ranges from the high to the low in all three (68 cents in soybeans, 24 cents in corn, 36 cents in wheat). On the charts, this is a really ugly picture. A new high and then a lower close is called a key reversal. In addition, a higher close on neutral/slightly bearish news (USDA) and a lower close after a strong move on bullish news (CONAB) is not encouraging. However, I think there are still enough questions to be answered about South American crop size, demand and US acres that I am not waving the flag saying the highs are in. I think we are in for more volatility in both directions but do not believe the trend has turned lower here. Again, time will tell.
What To Do
I have not seen anything to make me change my direction. To manage risk, I still think you need to be scaling in bean sales until you get around 85% priced. Hold the last bit for gambling. Scale in new crop sales on beans above $14. I would get at least 25% sold on new crop beans. Obviously if you want to take more risk, price less and roll the dice. If we add any Northern Hemisphere weather problems to the South American issues, we are going to have to go to levels to slow demand and we have not been there yet. These markets will be explosive but there is no guarantee of that. There is a lot of risk on the table. Everyone has to find the level he is comfortable with. There are good profits to be locked in right now.
On corn, I would be scaling in old crop sales but being a bit more patient on new crop. We got near $6 today on Dec corn but were not able to get through. Keep working orders on old crop and looking for good basis. Basis is extremely strong in the Southeast.
On wheat, I would not be making any sales below $8 on old or new crop. Basis on new crop is staying a bit firmer than many had expected with wheat acres in the western part of North Carolina. Things have not calmed down in the Ukraine/Russian border, they just are not in the headlines as much right now.
Cotton has been under pressure since USDA’s report which estimated ending stocks at 3.5 million bales vs expectations of 3.29 million. Exports have been slow which is also weighing on cotton. Volatility in the stock market continues to have influences on cotton in both directions depending on the day. Strength in crude and weakness in the dollar has supported cotton. USDA’s world ending stocks came in just below trade expectations.
If you have any old crop cotton left, you are much more brave than most. I still think we need to be scaling in sales on new crop. There is profit being offered with any kind of yield.