By: Ted Seifried
Ted is the Chief Market Strategist and Vice President in charge of the Zaner Ag Hedge Group and specializes in agricultural hedging employing various strategies using futures, futures spreads, outright options and option combinations. He believes it is paramount to be able to use different strategies to adapt to market conditions. Ted works with large to mid size grain and livestock producers and end users in North, Central and South America.
Grain markets, specifically corn and soybean markets are taking the current USDA ending stocks projections with a grain of salt. In the December USDA WASDE (World Agricultural Supply and Demand Estimates) the USDA trimmed ending stock estimates for corn and soybeans but still suggested very large ending stocks figures. However, grains traders remember very well what ended up happening to the large corn and soybean estimates from this time last year and are cautious to buy into the big ending stocks concept.
On the December 2014 USDA WASDE report the USDA estimated ending stocks for corn at just under 2 billion bushels at 1.998 billion, and soybean ending stocks at 410 million bushels. If realized these would be some of the largest corn and soybean stocks we have seen in recent history. This is not a surprise considering the USDA is reporting record crops of corn and soybeans last year. However, the trade also remembers that at this time last year the USDA was expecting big ending stocks but when all was said and done ending stocks were much smaller then the December estimate.
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On the December 2013 USDA WASDE report the USDA was expecting a corn carry over of 1.792 billion bushels and soybean ending stocks of 150 million bushels. However, final ending stocks for the 2013/2014 marketing year cane in at 1.236 billion bushels for corn and only 92 million bushels for soybeans (which means we effectively ran out of soybeans). The reason for this is that the USDA was sharply underestimating export demand for both corn and soybeans. In the December 2013 report the USDA was estimating corn exports at 1.450 billion bushels and the final number was 1.917 billion. That means that corn exports were 467 million bushels stronger then expected! That is A LOT of corn. For soybeans the USDA was estimating 1.475 billion bushels of soybean exports the final number came in at 1.647 billion. Here too exports were significantly stronger then originally expected and in both cases this added up to much smaller then expected ending stocks.
For this year the USDA is looking for even bigger ending stocks then they were at this time last year but, the trade is wondering if the same sort of thing can happen again. The thought is that with cheaper prices this year demand as a whole may be even stronger and cut the big ending stocks numbers back down again. So far export sales for soybeans have been stronger then the record pace set last year. However the USDA is looking for export sales to increase by 113 million bushels as part of their current balance sheet. This means that the strong export sales we have seen in soybeans so far this marketing year will have to keep up for some time. While this is possible it seems likely that much of the export sales will shift to South America later in the year as long as they have a good crop and can get it shipped out in time.
Corn export sales have not been as good so far this year. The USDA is already looking for a year over year reduction in export sales but we are still below the pace needed to hit the USDA target. This is a concern because after having a record corn crop and having relatively low prices we would expect export sales to be very strong at this point. What has been strong for corn is corn used for ethanol production. On a weekly basis we have been well over the average needed to hit the USDA projection for the last 5 weeks. While this might not make up for lower exports if the pace does not pick up it could offset much of it. However with crude oil prices falling we have to wonder how long ethanol demand can stay strong given the fact that is getting less competitive with unleaded gasoline.
The bottom line is that the grain markets are currently taking the large ending stocks projections with a grain of salt. With the unexpected and sharp increase in demand last year the trade is choosing to take more of a wait and see attitude this year. But, this does not mean with certainty that ending stocks will fall by the end of the marketing year either. The key here may well be South America. If South America gets through their growing season without much issue it could mean that global demand shifts to South American grain later in the year and that USDA projections could be close to reality. However, if South America has any issues more global demand may need to get filled with US grain tightening ending stocks dramatically. So, for now we may wait to get a better feel on South American the South American crop and export/ethanol demand before we really buy into the big USDA ending stocks numbers.
~~TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND MAY NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.