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Will US grain stocks data, again, provoke price mayhem?

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Sitting comfortably?

That may all end on Monday, for grain and oilseed investors, when the US Department of Agriculture unveils quarterly data on crop stocks – the amount of inventory hanging around on September 1 in US farm bins, elevators, ports and consumer silos.

'Got it completely wrong'

If that sounds a formality, it isn't.

Estimates for September 30 USDA stocks report - corn

Average estimate: 681m bushels

Range of estimates: 552m-750m bushels

Year before: 989m bushels

Stocks as of June 1 2013): 2.764bn bushels

Report measures stocks as of September 1

Sources: USDA, ThomsonReuters poll

In 2012, the opposite happened. Inventories of the grains, and soybeans too, fell well below expectations.

The result was surges of more than 5% in Chicago corn and wheat futures.

And this year, well, the experience of 2011 and 2012 means that the "market is likely to go into the report very quiet", Rich Nelson, chief strategist at Allendale, the Chicago-based broker, said.

"The market has, after all, in the last two years got it completely wrong."

Knowns and unknowns

OK, many of the numbers which go into the report are known, pretty much, such as exports, or how much corn is used in ethanol or, from industry processing data (the USDA has ditched its own reports) the volume of soybeans crushed domestically.

Estimates for September 30 USDA stocks report - soybeans

Average estimate: 124m bushels

Range of estimates: 106m-155m bushels

Year before: 169m bushels

Stocks as of June 1 2013: 435m bushels

Report measures stocks as of September 1

Sources: USDA, ThomsonReuters poll

But there is a big unknown on grain demand, the amount which has been fed to livestock, which indeed the stocks reports are used to derive.

And this year that looks especially difficult to predict, given a big question mark over the size of the US hog herd, thanks to a drop in slaughter rates, although another USDA report due late on September 27, the Hogs and Pigs briefing, should go some way to clarifying dynamics.

'Greatest risk of a bullish surprise'

Furthermore, there is the issue, for corn especially, of how much of the newly-harvested crop has been used, skewing dynamics.


Estimates for September 30 USDA stocks report - wheat

Average estimate: 1.913bn bushels

Range of estimates: 1.819bn-1.999bn bushels

Year before: 2.105bn bushels

Stocks as of June 1 2013: 718m bushels

Report measures stocks as of September 1

Sources: USDA, ThomsonReuters poll

And history tells us that it is wheat where there is the greatest chance of a stocks overestimate, implying rising prices.

While analysts have underestimated corn and soybean stocks in four of the last six years, in wheat, they have a greater tendency to put their inventory guess in too high.

"The greatest risk of a bullish surprise on Monday in in wheat," Richard Feltes at RJ O'Brien said.

At AgResource, chief economist Bill Tierney said that "it seems that the trade is not too good at estimating wheat stocks", with his research, going back to the 1980s, showing that 73% of the time, "they guess too high".

Buoyant wheat feeding?

And there is reason to think the average wheat inventory guess, of 1.913bn bushels, may on Monday again turn out to be too high, with Mr Feltes flagging the potential for a 300,000-500,000 acre drop in the estimate for harvested area, based on insurance claims by farmers unable to plant.

Estimates for US wheat harvest (in Small Grains report also released)

Average estimate: 2.108bn bushels

Range of estimates: 2.016bn-2.137bn bushels

Current USDA estimate (from August Wasde report): 2.114bn bushels

2012 harvest: 2.269bn bushels

Sources: USDA, ThomsonReuters poll

"Wheat was trading at a discount to corn in the cash markets throughout the summer period," Mr Gadd said.

"The combination of the price incentive and historically tight corn supplies will have ensured feeders changed their ration."

Stocks of hard red winter wheat dropped to 742m bushels, the lowest since 2006, with those of soft red winter wheat, the type traded in Chicago dropped to 354m bushels as of the start of the month.

"The tightness of the US soft red winter wheat balance sheet shows that the US can ill afford to sell any further volumes of wheat to the Chinese," he said.

Price correlations

Still, even if stocks figures do alter dramatically from estimates, what does that mean for price moves?

In fact, as of a week after the data, there is for corn and wheat only a "moderate" correlation between the change in futures prices and the move suggested by the September 1 stocks data, Mr Tierney said.

And for soybeans, even the day after the report, the change in the nearby November futures contract is "not correlated" to the stocks data at all.

The trump card

There is, though, a trend in soybeans.

And that is for lower prices, with futures down 22 years out of the last 30 on the day after the stocks report, compared with prices before the data, a factor Mr Tierney sees related to harvest pressure, as fresh soybean supplies come on line.

"Seasonality is the most dominant fundamental factor," he said.

"Every day you get more supplies, which pushes cash prices down, and that tends to pull down futures.

"What happens in the stocks report is relatively insignificant in where prices go for the next 30 to 40 days.

"It can have an impact on prices, and has had an impact, but generally does not."


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