Quarterly stocks and small grain summary
By KRISS NELSON
With the most recent quarterly stocks and small grains report, what will this mean for the both the cash and futures markets?
During his summary of the report, Darin Newsom, DTN senior analyst, said he views the soybean and corn market as both “neutral,” even though there was a small rally the day of the Sept. 29 report.
Out of all of the reports given by the USDA, Newsom said he is most interested the quarterly stocks updates. These particular updates, he said, are always a better indication of how demand is going and it does or does not fit with what the markets are doing.
“The most interesting about September numbers, especially in corn and in soybeans – the two markets that seem to get the most attention – is the fact that this is de facto ending stocks number for the 2016-2017 marketing year and becoming beginning stocks for the 2017-2018 marketing year it is basically the start, or what we have on hand heading into harvest,” said Newsom.
He added the crop he watches the most in the September USDA report is soybeans.
“This is the one that is the most entertaining – trying to gauge how far off USDA is from its over-estimates of what soybean ending stocks is going to be,” he said. “Almost, without fail, that’s what it comes down to and it certainly played out again this year.”
According the Newsom, the soybean ending stocks, as of Sept. 1, were 301 million bushels (mb) and soybeans went up 14 cents after the report on Sept. 29. That is last year’s (2016-2017) ending stocks and 2017-2018’s beginning stocks.
“Traders came rushing back in,” he said. “We’ve got a downtrend going on in the November soybean contract, but what they see right now is this came in below the 345 and the 339 mb average. Overall, it’s probably not as big of a deal that it is being made out to be right now. We will see what happens, not today, but as we head in to next week.”
This number, he explained, is a sizeable number – one of the highest numbers we have seen in 10 years.
Why are we continuing to see ending stocks numbers so high and what does this possibly mean for next year?
“Well, we are producing more,” he said. “What this really does, in my mind, is we have 301 mb ending stocks/beginning stocks. Does that change the possible acreage debate for 2018? If we have 301 mb ending stocks, and if we do see the type of production everyone is talking about right now in 2017, what does that do for the 2018 acreage debate? I think it’s going to be an interesting winter.”
Newsom said it will be interesting to see which side of the market comes in and how much support can be built on 301 mb.
“If it’s more commercial buying coming in, based on the idea they think demand is going to outpace of what we see the beginning stocks and possible production in 2017,” he said. “I think this sets the table for a very interesting last two-thirds of fall and over the course of the winter and even going in to spring. I think soybeans are going to be a very interesting market. Certainly worth watching.”
Fourth quarter demand for soybeans
Newsom said if we use the September supply and demand numbers, except for beginning stocks, we drop them from 345 mb to 301 mb and everything else stays the same. He added that if we take total supply from 4.8 mb down to 4.757 mb, we’re still talking production at 4.341 mb – there is still supposedly a huge crop out there, but that will have to wait until January to be confirmed.
“We drop ending stocks from 475 mb to 431 mb, lowering ending stocks to use from 11 percent to 10 percent – none of this is still overly bullish,” he said. “One of the things in play here is the fact that history has shown us that all of these demand numbers are probably underestimated and it’s possibly the production numbers are over-estimated. We see this combination year after year, time after time and that’s one of the reasons why we see the amount of buying coming into the market today.”
According to Newsom, 22 out of the last 27 years, the September quarterly stocks number for soybeans has come in below the initial May number given 15 months prior.
Some of these numbers, he continued, have been substantial decreases.
“So the pattern, as one can expect, is these numbers will continue to decline,” he said. “We’ll see some jumps in the wintertime. When there’s nothing better to do, the USDA can bump up the ending stocks number above 500 mb. That wouldn’t surprise me at all.”
“But what matters is, even though it doesn’t get traded in the markets until it’s too late – what matters is by the end,” Newsom continued. “If we go over 500 mb in projections by the time we get to next September, most likely we will be significantly lower than that. This year we are 37 percent below USDA’s highest estimate, and that’s actually on the lower end of changes that we have been averaging over the last three years of 62 to 63 percent decreases. Not saying things are getting better; I am saying it’s just more of the same. Here we are in 2017-2018 now with 475 mb – do not be surprised if it bumps up, but don’t be surprised if it comes down because this is just how this sort of thing works.”
Newsom said if the future spreads were more bullish, for example, instead of the 60-plus percent calculated of commercial carry-ins, the spread was closer to 35 percent or less, it would make a better argument that soybeans are getting ready to break and pop to the upside.
“This, right now, would suggest we will continue to hold in this pattern – we’re probably going to really test how far we’re going to go in this wedge between support of $9.30 and descending trend line,” he said. “At some point, we should break and we should break to the upside.”
This, Newsom said, means $10.67 a bushel for soybeans becomes another target.
“Can we get to $12? I think it would take some sort of production problem in the United States to come in well below what is being projected right now,” he said. “I think we’re going to see more consolidation. My overall view of the market, to me, is we still have spreads indicating we have plenty of supplies on hand. We’re still looking at a huge harvest – until proven otherwise – and even though demand is good, overall supplies seem to be adequate, so that is keeping the investment side of the market from going full boar into buying soybeans.”
The quarterly stocks report for corn, Newsom said, is usually not as interesting as soybeans.
“Corn likes to be comatose and it is certainly living up to that characteristic recently,” he said.
According to Newsom, the quarterly stocks number came in at 2.295 billion bushels (bb).
“This is the highest ending stocks number we have seen in 30 years going back to the 1987-1988 marketing year,” he said. “This is higher than where we were before the demand market began. This is a danger sign. This is a red flag in the corn market.”
Newsom further explained the reason it is really not having much of an effect on the market right now is because it has been known the ending stocks number for corn would be big.
“I’m sure it will be talked about at great length through winter and next spring,” he said. “How many more years are we willing to continue to produce this amount of corn? The wild card is going to be overall production – that’s what’s going to make this harvest interesting.”
Fourth quarter demand for corn
Newsom said fourth quarter demand is down below what we saw last year.
“Brazil got back in the game – moving more supplies back in to the world exports, they started to ship some corn, so we saw our export demand actually start to fall back in the fourth quarter,” he said. “Usually we ship corn the second half of the marketing year, this year we did a lot of corn (shipments) over the first three quarters and the fourth quarter came down.”
He predicted soybeans will continue to stay strong as we start the 2017-2018 marketing year, but not so much for corn.
“We’re going to have to see some life pumped back into the overall corn demand and corn exports in order for this market to start trying to pull itself out of this doldrums,” he said. “It’s going to be interesting to see what happens.”
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