PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 19:09 GMT, Thursday, 27th Jun 2013, by Agrimoney.com
History reveals path through US grain stocks data minefield

Brace yourselves.

Crop data from the US Department of Agriculture have a habit of moving markets, being taken as market standards, for grains and oilseeds especially.

But the USDA's quarterly stocks briefings have a particular knack for sparking volatility.

Witness the last report, in March, when the department's revelation that US stocks of soybeans, wheat and, in particular, corn were higher than investors had expected sent prices tumbling.

Corn futures tumbled 12.6% in two sessions in Chicago, on a front contract basis.

The previous stocks report, released in January, sent prices soaring, after inventories were seen falling well short of market expectations.

Friday's data will "going to set the tempo for a while, and influence how we are going to transition from a period of tight supplies to one where we think there will be ample supplies," Jerry Gidel, chief feed grains analyst at Rice Dairy, said.

'We hate this report'

"We hate this report," Rich Nelson, director of strategy at Allendale, the Chicago broker, told Agrimoney.com

Market estimates for US corn stocks, June 1

Average estimate: 2.845bn bushels

Highest estimate: 2.952bn bushels

Lowest estimate: 2.725bn bushels

Stocks as of June 1 2012: 3.148bn bushels

Stocks as of March 1 2013: 5.399bn bushels

Sources: USDA, ThomsonReuters

"You put out your numbers. But it is very difficult to know if they will turn out anything like what the USDA says. Futures prices may well go limit up or limit down."

And this is true especially for grains, for which there is a big unknown in the shape of so-called "feed and residual" demand.

For soybeans, data on the volumes crushed and exported, which are transparent, give a pretty good idea of how much of the oilseed is left in silos, so long as the figure for supplies at the start of the period was in the right ball park.

Big range

But for grains, especially corn, add up what you know has gone into industrial uses, such as making ethanol, into exports, seeds and any milling data that analysts can get hold of, and there is still a large vacuum of knowledge of how much as gone into livestock feed, yet alone what is put down to amorphous "residual" category.

In fact, during the last three years, during the March 1-to-June 1 quarter- the period that Friday's data will cover - feed and residual use of corn "has varied from 718m bushels in 2011 to 1.276bn bushels in 2010 - a 558m-bushel spread", Richard Feltes at broker RJ O'Brien noted.

That hardly reflects dynamics in the livestock herd alone.

Feed calculation

The average estimate for Friday of US corn stocks 2.845bn bushels, as of the start of this month, actually implies a figure of 830m bushels for feed and residual use, down from 858m bushels last year, which might seem a reasonable assumption, given some reduction in cattle feeding.

Market estimates for US soybean stocks, June 1

Average estimate: 442m bushels

Highest estimate: 500m bushels

Lowest estimate: 413m bushels

Stocks as of June 1 2012: 667m bushels

Stocks as of March 1 2013: 999m bushels

Sources: USDA, ThomsonReuters

Cattle on feed as of June 1 were down 3% year on year, as they were at the start of May too, data released on Friday showed.

"The major factor leading to reduced corn feed demand this season has been the weakness in cattle feeding," Chris Gadd at Macquarie said

"But at this point in the year cattle feeding is seasonally weak, so its influence won't be as sizeable on total demand."

In fact, "as we moved into the March-to-May period, lower corn prices caused a distinct improvement in margins across the feed sector, which will have been supportive of demand."

Report pattern?

Still, is it worth being quite so scientific when the stocks data have a habit of straying so far from expectations?

And especially when, with stocks so tight following last year's drought-hit harvest, any straying from the market consensus will have a large impact on supplies, and therefore on the prices that they can command.

"Even 100m bushels will be a big deal to the market," Mr Gidel said.

Allendale's Rich Nelson flags a different tack that investors can take, noting that with the stocks report for December 1 proving bullish, and the March 1 bearish, "if that pattern stays the same, we could have a mildly bullish report this time".

History lesson

Bill Tierney, chief economist at AgResource, takes this examination a little further, in looking at the trend of reports in the last six years, when their waywardness from investor expectations has taken off.

Market estimates for US wheat stocks, June 1

Average estimate: 745m bushels

Highest estimate: 781m bushels

Lowest estimate: 718m bushels

Stocks as of June 1 2012: 743m bushels

Stocks as of March 1 2013: 1.234bn bushels

Sources: USDA, ThomsonReuters

(This period coincides with the rise of the ethanol industry, viewed as one potential cause of the stocks surprises – but there are many theories doing the rounds.)

"If you look at the pairing of the June stocks report with the March stocks report, there is an inverse relationship," Mr Tierney told Agrimoney.com.

"If there is a surprise in March, the June report also tends to offer a surprise, but in the other direction."

Taken over a relatively short period, this "could be a spurious correlation. But that is what analysis of the data tells you so far", he added.

Sowings statistics

The inference is that investors could be in for a bullish report this time.

Still, investors have an extra important data point to factor in too, and that is the updated estimates for US plantings, expected to see a reduction in corn sowings and a rise in soybean area thanks to the wet spring.

(Soybeans are later sown than corn, providing an option for growers prevented by rain from seeding corn within the ideal window.)

Not that there appears to be such anticipation about the acreage data given that, being based on early June data when farmers were still in the thick of seedings this year, "it will not be the last word", Drax Wedermeyer at US Commodities said.

"I would not put much faith in Friday's numbers. USDA acreage numbers put out in August will be far more telling."

'Record basis, record inverse'

Nonetheless, if the two reports go a certain way, it is possible, Mr Tierney said, that "we could see a record inverse between old and new crop", meaning the size of the, atypical, premium between Chicago's old crop futures contracts, and the new crop ones.

Estimates for US 2013 sowings, March figure and (2012 final)

Corn: 95.313m acres, 97.282m acres, (97.155m acres)

Soybeans: 77.933m acres, 77.126m acres, (77.198m acres)

Wheat: 55.902m acres, 56.440m acres, (55.736m acres)

Includes spring wheat: 12.132m acres, 12.701m acres, (12.289m acres)

Sources: USDA, ThomsonReuters

"We could also see a record basis level too," the gap between cash and futures markets, if old crop supplies are seen thinner than thought, meaning more rationing is needed and thus higher prices.

Whether it is worth a bet, of course…

Waiting mode

Markets have been unusually quiet in the last couple of days.

The 3,000 lots that funds are estimated to have purchased in Chicago corn represented the smallest volume, buying or selling, in more than a month.

But given the extent to which hedge funds were caught out by the price slump following the March report, which some see as having accelerated an exit from agricultural commodities, a little caution is understandable.

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