WASDE WIZARD ® June 2018 Update for Corn and Soybeans
Futures already discounting “worst case” outlook?
You’d never know USDA’s June WASDE was seen as “price friendly” for both corn and beans by looking at dismal price action since last week’s release. That’s because of above average crop condition ratings and rapidly sagging confidence USDA’s export estimates will hold up as trade war drums pound louder. In my May 15 update, the Wizard model showed the path of least resistance was to lower prices. That proved correct but with June WASDE numbers plugged in, that same model now shows the market pessimism getting overheated … especially in soybeans.
Futures are already heading into the “worst case” outlook for corn according to the latest output of my WASDE Wizard® forecasting model. FIGURE 1 is tool #3 in my Wizard toolbox, which uses current national average basis to convert USDA’s WASDE forecast ranges for average farm prices to futures equivalents. As I wrote this, December corn futures were around $3.75. That’s only a dime above what my model projects to be the threshold for entering the lower third of the likely range for average farm prices even if the corn yield rises to 177.5 bpa!
This tells me future “surprises” going forward are more likely to be price supportive for corn than to feed the bears. The Wizard model says price pessimism is getting overdone.
NOTE: USDA’s June WASDE range for 2017-18 farm price was only a 30-cent range, from $3.25-$3.55, with a midpoint of $3.40. With the current .22 national avg. basis, the futures-equivalent midpoint rises to $3.62. However, USDA’s range for 2018-19 is a dollar, from $3.40 to $4.40. Adjusting that range for basis pushes futures equivalent midpoint to $3.95. The Wizard model only works when price ranges are kept the same between old crop and new crop; thus, the dollar range for old crop. Mid-points are not affected.
Soybean futures already discount a disastrous price scenario! As this is written, November soybean futures are barely above $9. Yet allowing for the current national average basis of about 40 cents, USDA’s June farm price range of $8.75 to $11.25 translates to a futures equivalent range of $9.15 to $11.65. That means current futures are below the low end of the lower third of the Wizard model’s price range, even with a yield assumption of 50 bpa!
By anyone’s definition, that’s an extremely (and I think overly) pessimistic market outlook. Thus, even more-so than in corn, future “surprises” for the soybean outlook are more likely to be price friendly than press prices further lower!
NOTE: USDA’s June WASDE report pegged 2017-18 average farm price at $9.40. Adjusting for basis, that’s $9.80. Its balance sheet for 2018-19 however, puts season average farm price within a $2.50 range because so much still hinges on weather and trade. After adjusting to “futures equivalents” the Wizard algorithms require a similar “range” for 2017-18 prices to generate 2018-19 forecasts under the different weather scenarios. The midpoint is not affected.
NOTE TO REMEMBER: Both USDA and WASDE Wizard price ranges are for season average price, not the range from “season high” to “season low”; a critical distinction. The highs and lows for the year can be well outside the range for season average price.
SUMMARY CONCLUSION AT THIS TIME: Traders hate uncertainty and default to either selling or doing nothing as uncertainty rises. That’s what’s in play as futures decline on the “assumption” of rising yield estimates and weakening U.S. export prospects tied to trade war threats and counterthreats. Inevitably such a market runs out of willing sellers about the same time buyer stocks are depleted and both sides begin to realize a “worst case scenario” is already in the market and the only “surprises” left are price-friendly ones. We may not be there just yet; but can see it from here.
Dan Manternach, President
Perfect Fit Presentations, LLC
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