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WASDE WIZARD® Perspective on July WASDE Numbers

WASDE WIZARD ® Perspective on July WASDE Numbers

First look at soybean losses USDA pins on Chinese tariffs

USDA confirmed traders have dialed in a “worst case scenario” for soybeans. They slashed estimated 2018-19 exports by 250 million bushels and raised ending stocks just shy of 200 million. (A 50 million bu. cut in estimated beginning stocks left over from 2017 softened the blow a bit.) It pinned the cut in exports squarely on retaliatory Chinese tariffs. They raised ending stocks 100 million bu. higher than pre-report trade estimates and lowered the estimated farm price range from $8.75- $11.25 last month to a new range of $8.00-$10.50.

Futures closed the week on a sour note Friday, but only about 15 cents lower than the closing price the day before the report. Why? Because if you tack on a national average soybean basis of 38 cents per bu. to the $8 low end of USDA’s new range for farm prices, you get a futures equivalent of $8.38, or four cents higher than Friday’s close in November futures! If you tack that basis on the HIGH end of USDA’s farm price range, you get $10.88, more than $2.50 above Friday’s closing price! It’s a strong case for markets already trading a “worst case scenario.” That’s why I think any future “surprises” on the supply or the demand side are more likely to be price-friendly than hammer prices further.

Wizard’s first estimate of how much USDA may “owe” soybean farmers in “reparations” hinted by Ag Secretary Sonny Perdue a couple weeks back.  He wouldn’t be specific; but said there’s funding available for USDA to compensate farmers for price losses pinned directly on Chinese tariffs. How much could that be? My WASDE Wizard forecasting model allows for a quick, rough calculation in soybeans: I plugged in all changes in the July WASDE numbers and left the mode’s algorithms unchanged except for exports. I short-circuited that algorithm and just entered last month’s export estimate. Sure enough, the model churned out a price range that is 23 cents per bushel higher than USDA’s WASDE range, solely on the drop in the export forecast that USDA itself pinned on Chinese tariffs. (I can’t guarantee this is the approach USDA will take to calculating any reparations owed, but it would make sense because my model is grounded in decades of monthly WASDE data, line item by line item.)

Corn fared well in July WASDE! Thanks to a drop in estimated beginning stocks and a 125 million bu. hike in estimated 2018-19 exports, projected U.S. ending stocks actually DECLINED by 25 million bushels. Further, USDA cut estimated global corn ending stocks for the 3rd straight month, to just under 152 million tonnes, 20% below beginning stocks. The estimated range for season average farm price was lowered just a dime, to $3.30-$4.30. Add a 23-cent national average basis to the low end of that range and you get a futures equivalent of $3.53, just 2 cents below Friday’s closing price for Dec. corn futures.  So, what I said about beans goes ditto for corn. Markets have dialed in a worst-case outlook for corn using USDA’s latest farm price range without even waiting for USDA to drop its corn export outlook if NAFTA talks break down and Mexico, our biggest corn customer, retaliates with big tariffs on U.S. corn.

It was good news and bad news in USDA’s first class-by-class balance sheets for wheat. All wheat ending stocks were raised by 49 million bu. due to higher beginning stocks and production estimates more than covering an increase in both domestic use and exports. The estimated range for season average farm price range was trimmed a dime on both ends, to $4.50-$5.50 with a midpoint of $5.00.

But that’s for “all classes combined” and of little value to farmers on a class by class basis. That’s why I look at Thursday’s first USDA breakout of ending stocks by class in days’ supply to see which classes are getting tighter and which ones rising in surplus. This bar graph tells the tale in relation to the 90-day supply considered the “threshold of tightness” by traders:


You can see clearly that the surplus situation is declining sharply for HRW, SRW and modestly for white wheat; while growing worse for HRS and durum. The good news for all wheat producers is that global fundamentals are improving due to poor crop prospects in Europe, Australia, Russia and Ukraine. Global ending stocks were lowered for a 3rd straight month, this time by more than 5 million tonnes. The July forecast of 261 million is still a 127-day supply, well above the 90-day supply “threshold of tightness.”

But keep this in mind: China’s ending stocks alone account for 52% of global carryout and China doesn’t export its wheat. In fact, if you look at the global stocks: use without counting China’s ending stocks or usage, as many analysts do, projected global wheat stocks drop to a 73-day supply … well under the 90-day threshold of tightness. That makes it unanimous in my view; pessimism reflected in wheat futures is overcooked as well. Further evidence of that is the fact that cash basis for wheat around the country is sharply improved over year ago levels.

SUMMARY CONCLUSION AT THIS TIME: Using USDA’s July forecasts for farm prices and adjusting them for basis to “futures equivalents”, current corn and soybean futures prices are already trading the low end of USDA’s ranges, even after anticipated export losses from retaliatory tariffs have been factored in.

 Dan Manternach, President

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