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USDA crop revisions are not as bearish as they look

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The latest revisions by US farm officials to their world crop estimates are not as upbeat for consumers - or downbeat for prices - as they first appear.

Sure, the data in the US Department of Agriculture's latest Wasde report seem at first sight to show a picture of above-forecast supplies for the main crops – corn, soybeans and wheat.

It is hardly surprising that the initial market reaction was to send futures prices in all three crops sharply lower.

But consumers hoping that the data will tip Chicago into a sustained price tumble, as they enjoyed a year ago, look set to be disappointed, on the results of today's evidence, at least.

Investors prepared

For a start, markets had factored in some room for disappointment.

Unlike during the run-up to the July and August Wasde reports, when prices rallied only to face pressure once the data were published, futures declined into this one – for five successive sessions in soybeans' case.

The selldown left the market better able to absorb some increase in crop supply expectations.

Pipeline minimum

However, the main reason for end-users to postpone their celebrations is that the hope offered by the Wasde data for supplies is built on poor foundations.

Sure, for soybeans, the USDA kept its estimate for domestic inventories at the close of 2012-13 at 115m bushels (3.1m tonnes), higher than the market had expected.

But that 115m bushels reflects the minimum level that the USDA is prepared to consider inventories falling to, the level at which it sees so-called "pipeline supplies", rather than corset of tight stocks loosening a button or two.

The forecast for the actual US harvest was cut, and by more than investors had expected.

Indeed, analysts, who had forecast stocks figures as low as 87m bushels, should reconsider the next time they pencil in any figure below 115m bushels without strong evidence on their side.

Harvested acres

The same goes for the 650m-bushel (16.5m-tonne) level in US corn stocks too, which also appears a minimum that the USDA will work to.

OK, the USDA has lifted its estimate for inventories above that floor now, to 733m bushels, suggesting a genuine easing up in supplies.

But that is based on a questionable assumption – that US farmers will harvest nearly the same proportion of their fields for grain as last year, despite the worst drought since 1956.

The USDA kept its estimate for harvested corn area at 87.4m acres, or 90.7% of sowings, despite reports of large amounts being cut for silage which prompted many investors to forecast figure for combined crop as low as 83.0m acres

Washington vs Canberra

There is reason to doubt the USDA's wheat forecasts too.

The downgrade of less than 500,000 tonnes, to 176.71m tonnes, in its estimate for world inventories in 2012-13, relies on Washington having a far more optimistic view of Australian wheat production than Canberra.

The USDA kept its estimate for the Australian harvest at 6.0m tonnes, 3.5m tonnes above the forecast from Australia's Abares crop bureau on Tuesday.

Furthermore, the USDA cut its forecast for feed use of wheat even while lowering further its forecast for use of other grains in fodder too.

All in all, the USDA is factoring in an 11.1% drop in feed use of wheat and coarse grains, which looks aggressive when supplies of wheat at least are still reasonable.

Price support, for now

In short, Wednesday's Wasde report posed as many questions as it answered.

The solutions to these queries may indeed turn out to favour buyers if, say, Australia's wheat crop indeed reaches 26m tonnes, or genetically modified seed saves US growers from hefty corn abandonment rates.

And, whatever the Wasde data, prices face some pressure from the ongoing US corn and soybean harvests, which are providing a temporary spike in supplies.

But markets look unlikely to allow crop to be bought cheaply until there is better evidence that crop stocks will not end 2012-13 as tight as investors have been led to believe.


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