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Doane Comments After the July WASDE

Posted By Doane Advisory Services | July 13, 2017 1:37 AM CDT

Corn

USDA revised U.S. 2016/17 ending stocks up 75 million bushels from June to 2.370 billion bushels. Ending stocks came in about 50 million bushels above trade expectations. The surprise was a larger than expected cut to feed and residual use. USDA lowered it by 75 million bushels from last month to 5.425 billion. No other changes were made to demand so the cut to feed and residual fell through to ending stocks. The season average price range held steady at $3.25 to $3.45.

For 2017/18, the revisions were more significant.  While USDA left the trend yield intact at 170.7 bushels, the acreage estimates from the June report were incorporated into the report. Planted and harvested acreage is now pegged at 90.9 and 82.5 million, respectively, up from intentions. The acreage revisions raised production by 190 million bushels to 14.255 billion. Note that most in the trade are actually using a lower yield estimate in their balance sheets. Doane’s current yield estimate is 167 bushels per acre and the yield is at risk of moving lower with continued heat and dryness through July. Even so, with larger carryover from 2016/17 and increased production, total supply is 16.675 billion bushels, up 265 million from June and down 265 million from 2016/17.

On the demand side once again the only revision is to feed and residual, but for 2017/18 the revision is higher, up 50 million from a month ago to 5.475 billion. With the adjustments, feed and residual use in now forecast to increase year-over-year rather than decline as was projected in June.  2017/18 ending stocks are forecast now at 2.325 billion bushels, 215 million higher than last month and slightly higher than 2016/17. USDA’s forecast seasonal average price forecast price range is $2.90 to $3.70 per bushel, down 10 cents for both the high and low end of the range. 

Globally, most of the revisions stem from changes to the U.S. forecast with increased production and ending stocks. However, Argentina’s 2016/17 crop is revised up 1 mmt to 41 mmt. Brazil’s crop is unchanged from last month at 97 mmt. Global 2017/18 corn production is projected at 1036.9 mmt, up 5 mmt from June, but down 31.9 mmt from 2016/17. World use climbs 0.9% from this year to 1063.6 mmt. Ending stocks decline from 227.5 mmt this year to 200.8 mmt in 2017/18. Lower Chinese ending stocks account for about three quarters of the decline.    

Soybeans

USDA reduced its 2016/17 soybean ending stocks forecast by 40 million bushels to 410 million bushels. Trade expectations were higher. An example was the Dow Jones poll at 434 million bushels. Our Doane forecast was also higher. There was no surprise that USDA cut the crush forecast, this month by 10 million bushels. That actually adds to the carryover. What was a surprise was that USDA finally increased its export forecast, and aggressively, by 50 million bushels. There has been plenty of evidence for months that exports would be stronger than the past USDA forecast at 2.050 billion. Why it finally decided to make the change this month, and so dramatically, is a frustration in following the USDA analysis. Nonetheless, that change resulted in the net 40-million-bushels reduction for the carryout. As noted, USDA cut the crush by 10 million to 1900 million. That is a match to the Doane forecast for some weeks. Again, there seemed to be plenty of evidence in June that the forecast at 1910 million was too high, but the drop waited until this month. Finally, USDA is forecasting the average cash price at $9.50, down 5 cents from last month.

USDA increased the 2016/17 foreign production forecast by 0.47 million tonnes to 234.57 million. Global production totals 351.78 mmt, up by the aforementioned 0.47 mmt in the foreign balance sheet. USDA forecasts trade higher by 0.56 mmt, but with Argentina’s exports down 500,000 and Brazil’s down 900,000 tonnes from last month. The US is higher. USDA’s global demand forecast at 331.43 mmt was up 200,000 tonnes. Global ending stocks increase by 1.57 mmt to 94.78 mmt. China, Argentina and Brazil’s ending stocks forecasts were higher.

USDA forecasts new-crop 2017/18 ending stocks higher year-over-year to total at 460 million bushels, which is down 35 million from its June forecast. Carry-in from 2016/17 was down 40 million bushels. There was a small offset of 5 million more bushels of production from the 31,000-acre increase in plantings. USDA kept its yield forecast unchanged at 48.0 bushels per acre. That has been its operational approach for most July updates for over two decades. The exceptions are the extreme years, such as in 2012 when there was the widespread drought. Use forecasts were unchanged. That was surprising given that the old-crop crush forecast was reduced 10 million, meaning the current forecast for 2017/18 is up a rather lofty 50 million bushels year-to-year. The ending stocks forecast was below trade averages. In the Dow Jones poll, the analyst average forecast was at 483 million bushels. Again, we would attribute that to the lower-than-expected carryover from the 2016/17 crop year. The price range forecast is very wide, ranging $2 between the high and low - $8.40 to $10.40 with a mean price forecast of $9.40. That is up 10 cents from June. 

USDA updated its global supply/demand forecasts for 2017/18. There were modest upward changes in the production and use forecasts. Global production is forecast at 345.09 mmt, up from 344.67 mmt last month. Both the US and foreign forecasts were slightly higher. We would note that there were no changes to the production forecasts for Argentina, Brazil, and Paraguay, although USDA did increase China by 200,000 tonnes. The total use forecast was up 1.06 mmt to 345.27 mmt. That was caused by the China use forecast being revised higher by 1.3 mmt to 108.10 mmt. USDA forecasts ending stocks at 93.53 mmt, up from 92.22 mmt last month. That is an increase of 1.32 mmt. We would note that it is down year-to-year, but historically high.

Soybean prices traded lower initially, rebounded to near unchanged, and then fell sharply. The US forecasts were actually bullish against expectations. Much more attention is on U.S. weather forecasts, which have been indicating the possibility for some moderation in the near-term, compared to previous forecasts; that could bring some rain relief to portions of the Midwest. 

Soybean Products

Soybean Oil 

USDA reduced its soybean crush forecast by 10 million to 1900 million bushels for the 2016/17 product year. The soyoil yield forecast was unchanged at 11.61 pounds/bushel. The production estimate dropped 115 million pounds. Soybean oil ending stocks are estimated at 2.097 billion lbs., up 110 million lbs. from last month. The food, feed & other industrial use category declined 100 million pounds. Total use for biodiesel was down 200 million at 6.0 billion pounds. USDA finally lifted the export forecast, this month by 100 million pounds. The price forecast was set at 32.00 cents, up 0.25 cent from last month.

In the U.S. outlook for 2017/18, there was the higher carry-in discussed above. Additionally, USDA lifted the import forecast by 25 million. Use forecasts were unchanged. USDA forecast month-to-month ending stocks up 135 million pounds to 2,292 million, and up 195 million year-to-year. USDA forecast cash prices ranging from 30.00 to 34.00 cents per pound, median at 32.00 cents, and unchanged from last month.

Globally, USDA minimally reduced the 2016/17 total crush forecast to 290.45 mmt from 290.57 mmt last month. The forecast for global soyoil production declined from 54.27 mmt to 54.25 mmt. Global soybean oil carryout increased by 0.12 mmt from June to 3.75 mmt. USDA anticipates 2016/17 global vegetable oil ending stocks little changed at 18.60 mmt, down from 20.27 mmt in 2015/16.

USDA forecasts global 2017/18 crush at 302.23 mmt, up from 301.53 mmt last month and up from 290.45 mmt in 2016/17. USDA sees global new-crop use increasing to 55.92 mmt from 53.57 mmt in 2016/17. In terms of global vegetable oil ending stocks, those project higher for 2017/18 at 20.01 mmt from 18.60 mmt year-to-year.

Soybean oil prices were lower following the reports. Ending stocks forecasts were higher despite the reduction in the 2016/17 U.S. crush forecast.

Soybean Meal

USDA reduced its soybean crush forecast by 10 million to 1900 million bushels for the product year. The soymeal yield forecast increased 0.04 to 46.99 pounds. The production estimate dropped 200,000 short tons. The domestic use projection was reduced 100,000 short tons to 33.050 million. The export forecast was reduced by 100,000 tons to 11.9 million. The price forecast was increased by $5 to $320.  In the U.S. outlook for 2017/18, there were no changes in the USDA supply and use forecasts. The price forecast was increased by $5 on each end of the range to $300 to $340.

Globally, USDA minimally reduced the 2016/17 total crush forecast to 290.45 mmt from 290.57 mmt last month. USDA forecasts global soybean meal production at 227.69 million tonnes which was down from 227.73 mmt last month. USDA forecasts global 2017/18 crush at 302.23 mmt, up from 301.53 mmt last month and up from 290.45 mmt in 2016/17. USDA sees global new-crop use increasing to 234.85 mmt from 223.64 mmt in 2016/17. Global production is forecast at 237.43 mmt, up from 236.92 mmt last month, and up from 227.69 mmt, year-over-year.

Soybean meal prices were lower following the release of the new data, declining on weather factors that were weighing on soybean prices.

Wheat

USDA updated its forecast for the winter wheat crop, boosting production by 29 million bushels from June to 1.279 billion bushels. The yield estimate for Kansas, the largest wheat producing state, increased 3 bushels to 47 bushels per acre and Colorado increased 2 bushels to 42. Neighboring Oklahoma was unchanged at 33 bushels while Texas’ yield fell 2 bushels to 28. Yields for Missouri and Illinois were higher. Nationally, the winter wheat yield forecast increased by 0.8 bushels to 49.7 bushels. The HRW crop totals 758 million bushels, down from 1,082 million last year. The soft red forecast is also lower, down 40 million from a year ago to 305 million. The white winter totals 198 million, down from 219 million last year. Overall, winter wheat production came in 20 million to 25 million bushels above trade expectations. 

In its first forecasts for other spring and durum wheats, USDA estimates the other spring yield at 40.3 bushels versus 47.2 last year. But with fewer acres, the crop totals 423 million, down from 534 million to the lowest production since 2002. In the case of the durum crop, initial yield forecasts are down at only 30.9 bushels from 44 bushels last year. Also with lower acreage, production is down sharply to 57.5 million bushels compared to 104 million last year.  Compared to trade estimates, other spring wheat production is about 14 million higher than expected while durum is nearly 20 million bushels lower. 

Total wheat production projects to 1,760 million bushels, down 550 million bushels from 2016 and only slightly higher than trade expectations. 

In the WASDE 2017/18 analysis, USDA incorporated the lower crop production forecast along with the recent June 1 stocks estimate. The total supply projects to 3,084 million, down 31 million from last month, but down 319 million from 2016/17. On the use side, USDA cut its feed use by 20 million and exports by 25 million from last month. Ending stocks project to 938 million for 2017/18. That is up 14 million from the June forecast. Even so, USDA raised its price forecast range by 50 cents on either end to $4.40 to $5.20, mean $4.80.

USDA also updated its global supply and demand estimates in the WASDE. For 2017/18, global ending stocks are down only 0.6 mmt to 260.60 mmt from last month. That is up from 258.05 in 2016/17. China’s ending stocks remain massive at 127.19 mmt and at more than one year’s annual use. The global production forecast is down this month, with the decrease in the U.S. a major factor. The forecast is 737.83 mmt, down from 739.53 mmt last month. Last year totaled 754.31 mmt. Forecasts for Australia, EU, China and Ukraine are lower from last month while USDA increased Russia by 3 mmt.

Wheat prices were lower on the surprisingly large U.S. winter wheat crop and significant cuts to projected demand. However, with continued hot, dry conditions forecast for the northern Plains, further cuts to the spring wheat crop are likely.

Cotton

The USDA made no changes to its 2016/17 cotton supply and demand estimates, with the only shift being a 0.50-cent cut in the projected annual price average for the crop year from 68.50 cents to 68.00 cents/pound. That obviously marked a response to the sizeable price drop suffered during late June and early July. We at Doane remain rather puzzled by USDA’s continued refusal to boost its estimate for old-crop cotton exports, which we still believe will ultimately be revised up to the 14.7 million-14.8 million bale range, which in turn would likely force a commensurate downward revision to old-crop carry-out, to the 2.9 million-3.0 million bale level. Conversely, with the industry now greatly focused on new-crop prospects, the market seems unlikely to react strongly to such a move.

As usual, USDA adjusted its July WASDE acreage estimates in the wake of its June 30 Acreage report, which stated spring 2017 U.S. cotton plantings at 12.055 million acres, down 178,000 from the previous figure provided by the March Planting Intentions report. The harvested acreage forecast was trimmed accordingly, down 200,000 acres to 11.18 million. As was the case prior to the report, USDA continues using a comparatively low abandonment figure at 875,000 acres, whereas the long-term average is around 1.5 million.

In contrast to the acreage reduction, USDA raised its average U.S. cotton yield estimate by 6 pounds from the previous forecast; that now stands at 816 pounds/acre. This figure would mark a 51-pound drop from the outstanding 2016 result and is much closer to the long-term trendline yield figure at 835 pounds/acre. The net result of these changes was a 200,000-bale cut in USDA’s 2017/18 cotton production estimate, which now stands at 19.00 million bales. That easily tops last year’s 17.17 million bale estimate due to the big acreage increase.

USDA analysts made no other changes to the various production/usage projections, so the production cut flowed through to the carry-out forecast, resulting in a 200,000-bale reduction to 5.3 million bales. Nevertheless, the big price losses suffered since the June release caused USDA to chop the top end of its price forecast from 74.00 cents to 68.00 cents/pound. Thus, the current range for the projected 2017/18 price average narrows to the 54.00-68.00 range, with the midpoint coming in at 61.00 cents/pound. ICE cotton futures slipped in the wake of the data release, implying the industry was not encouraged by the news.

As for the global situation, USDA again boosted its world cotton production estimate for the 2016/17 crop year by 550,000 bales, thereby reflecting a 500,000 boost to its Indian production estimate. It also raised its global import figure by 320,000 bales (to 36.71 million) and trimmed total world exports by 240,000 (to 36.56 million). Global usage edged up 200,000 bales to 113.77 million bales. The net result of these various changes was a 930,000-bale increase in forecast 2016/17 ending stocks, now at 90.27 million bales.

The rise in old-crop carry-out obviously meant a commensurate rise to beginning stocks for the 2017/18 crop year. The dip in the 2017 U.S. production forecast was easily offset by a 1.0 million-bale jump, to 29 million bales, in Indian output, with the global total rising 630,000 bales to 115.36 million. In contrast, USDA’s global usage forecast climbed 520,000 bales to 117.03 million, thereby reflecting another Indian change, where consumption is seen rising 550,000 bales to 24.75 million. Shifts in global trade flows were minimal, so the various shifts added up to a 1.02 million bale increase in projected global carry-out, which is now forecast at 88.73 million bales.

The latter result is the likely source of the negative cotton futures response to the WASDE data. That is, the cotton industry has been banking on a substantial drawdown in burdensome global stocks over the long-term, but these latest revisions imply an annualized drop in global inventories of just 1.54 million during the forthcoming crop year. It would take the industry decades to get global stocks down to historically normal levels at that rate.