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Will the Wasde hand ag investors another shocker?

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All the best horror stories manage a sequel.

For Nightmare on LaSalle Street - the March 28 event, in which a relatively large US corn inventory estimate sent prices plunging – the follow-up occurs today.

The US Department of Agriculture will at 11am Chicago time (17:00 UK time) unveil a its monthly Wasde report, updating estimates for domestic and world supply and demand of crops from cotton to soybeans.

And it is the implications of that discovery on March 28 of 400m bushels more corn than the market had expected that will focus traders' attention.

'Highly important'

In fact, normally the April Wasde report is not so significant, coming when estimates are getting close to final levels, and when attention is turning to the next marketing year, for which the USDA reveals its first full forecasts in May briefings.

Forecasts for 2012-13 Wasde corn data, (current USDA figure)

US carryout stocks: 812m bushels, (632m bushels)

World carryout stocks: 119.1m tonnes, (117.5m tonnes)

Argentine harvest: 25.59m tonnes, (26.50m tonnes)

Brazilian harvest: 72.90m tonnes, (72.50m tonnes)

Sources: USDA, ThomsonReuters

The Wasde has now become "highly important", in assessing how much of the "extra" corn will be swallowed as lower values encourage demand, and how much will make it through to the carryout number for 2012-13 which has a key impact on futures.

The ratio of end-of-season stocks, compared with use, is a major pricing metric.

Hard numbers vs estimates

In fact, expectations for the carry-out stocks figure have continued to decrease from levels of up to 1.0bn bushels immediately after the report- when Goldman Sachs said that the stocks figure weak net exports imply that ending stocks will remain at a comfortable 900m bushels – to an average of 812m bushels at the end of last week.

And even that might prove too large, with a continuing decline in inventory ideas viewed as largely behind a rebound of 2.5% in corn prices (as of 06:00 Chicago time, 12:00 UK time) this week.

"We see the figure might be a little less than 812m bushels, which could be a little supportive to prices," said Dustin Johnson at broker EHedger, who said that he was nonetheless bearish on futures longer term thanks to the prospect of a huge US harvest this year.

"The stocks figure was a hard number. The Wasde data are forecasts, and the USDA might take a more gradual approach to its revision."

'Don't believe this number'

However, just how hard was the March 1 stocks figure?

Forecasts for 2012-13 Wasde soybean data, (current USDA figure)

US carryout stocks: 136m bushels, (125m bushels)

World carryout stocks: 59.81m tonnes, (60.21m tonnes)

Argentine harvest: 50.50m tonnes, (51.50m tonnes)

Brazilian harvest: 82.54m tonnes, (83.50m tonnes)

Sources: USDA, ThomsonReuters

Factoring out corn used in ethanol and exports, for which volumes can be gauged from other statistics, the US March 1 stocks estimate of 5.4bn bushels implies feed and residual demand of 1.09bn bushels since December 1 – down nearly 50% from that the quarter before, according to Macquarie.

That would be "by far" the largest difference between the quarters in the last 20 years, Macquarie analyst Chris Gadd said, adding that "we don't believe this number is all it seems at first glance".

"Corn feeding is likely running stronger than the feed number would suggest," given expansion in the hog and poultry sectors encouraged by margins which "have made a steep shift higher" as grain prices have fallen.

Indeed, Macquarie forecast the stocks number coming in today at just 686m bushels.

Lesson from history?

US Commodities took a different approach to resolving the puzzle.

Don Roose, the president of the Iowa-based broker, questioned how "with more grain consuming animals than last year, we can consume so much less feed", as the stocks data implied.

But the broker's research suggests that the USDA on average passes on 57% of supply differences, from market estimates, in March stocks reports onto the April Wasde numbers.

This means that the USDA will today cut its estimate for US corn feed demand in 2012-13 by close to 200m bushels.

Price impact

Even so, what will the impact on markets be?

Forecasts for 2012-13 Wasde wheat data, (current USDA figure)

US carryout stocks: 727m bushels, (716m bushels)

World carryout stocks: 178.55m tonnes, (178.23m tonnes)

Sources: USDA, ThomsonReuters

The recovery in prices this week already appears to have priced in some allowance for a low stocks number, and the willingness of funds to jump on a bullish number may be poor.

EHedger's Mr Johnson said: "They got creamed after the stocks report. I do not see a lot of potential for funds getting excited about this report."

Mr Roose said: "The market will likely quickly turn to seeing what the weather looks like," and the implications on the pace of US spring plantings, and the potential impact of wet or cold delaying sowing or development and reducing yield potential.

"The market will not get really concerned until later in April, moving into May.

"But the forecasts are not encouraging. Through the third week of April they are looking wetter if anything. And we have to get a big crop this year."

By Mike Verdin

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