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Doane Economists' Comments After the November 2017 WASDE

Posted By Doane Advisory Services | November 9, 2017 9:33 PM CST

USDA'S NOVEMBER CROP PRODUCTION AND SUPPLY/DEMAND REPORTS

CORN

USDA revised 2017 U.S. corn production up 298 million bushels from October to 14.578 billion bushels. The estimate exceeded trade expectations by about 250 million bushels. Harvested acreage is unchanged from last month at 83.119 million acres. The yield is forecast at a new record-high 175.4 bushels per acre, up 3.6 bushels from October and 0.8 bushels above the previous record yield of 174.6 in 2016.   

Yields increased for 8 of the 10 objective yield states. The yield rose 6 bushels for Illinois, 8 bushels for Indiana, 6 bushels for Iowa, 2 bushels for Kansas, 6 bushels for Minnesota, 3 bushels for Missouri, 3 bushels for South Dakota and 4 bushels for Wisconsin. Nebraska’s yield fell 2 bushels and Ohio was unchanged from October. Somewhat surprisingly, none of the 10 objective yield states were records. However, many of the largest states are close to their record and several surrounding states are projected to achieve a new record-high yield.

With the revised production estimate, total corn supply is now projected at 16.922 billion bushels, only 20 million below 2016/17. The additional supply is partially offset with increased feed and residual use and exports. Based on the larger crop size, USDA raised feed and residual use by 75 million bushels from October to 5.575 billion. That’s up 112 million bushels from 2016/17. Exports are now projected to reach 1.925 billion bushels, a 75 million bushel increase from last month. Lower exports from the Ukraine and strong demand from Mexico due to reduced domestic sorghum production are seen as factors behind the increase in U.S. exports. Total use is now forecast at 14.435 billion, a 150 million bushels increase from October. Ending stocks are forecast at 2.487 billion vs. 2.295 billion in 2016/17 and 2.340 billion last month. Despite higher ending stocks, the season average price range is unchanged at $2.80 to $3.60 per bushel. The $3.20 midpoint is down from $3.36 last season.

Globally, the supply and demand revisions are slightly negative for prices as increased production more than offsets higher consumption. World corn production is estimated at 1043.9 mmt, up 5.1 mmt from last month, but down from 1074.8 mmt a year ago. Global use is 1066.6 mmt, up 1.8 mmt from October and 4 mmt higher than 2016/17. Ending stocks are now forecast at 203.9 mmt compared to 201.0 mmt last month and 226.6 mmt last season.

SOYBEANS

USDA made a minor downward adjustment to its production forecast, dropping it by 6 million bushels to 4,425 million bushels. The lower direction for production was in line with trade expectations. However, the change was so minimal as to leave the yield unchanged to the first decimal point at 49.5 bushels. Ten states had higher yields and ten had lower yields. Some 2017 yield forecasts versus last month comparisons: Illinois (58.0 vs 57.0), Iowa (56.0 vs 56.0), Minnesota (46.0 vs 46.0), Indiana (55.0 vs 55.0), Ohio (51.0 vs 52.0), Missouri (49.0 vs 49.0). In the Plains: North Dakota (35.0 vs 36.0), South Dakota (45.0 vs 45.0), Nebraska (58.0 vs 56.0), and Kansas (40.0 vs 41.0).  Some southern states: Arkansas (50.0 vs 51.0), Kentucky (52.0 vs 53.0), Louisiana (54.0 vs 54.0), Mississippi (52.0 vs 52.0), North Carolina (41.0 vs 39.0), and Tennessee (51.0 vs 50.0). The surprise for the state yields was probably Illinois, where there was much anecdotal talk that the yields were less than expected, but USDA actually ended up increasing its forecast.

USDA forecasts US 2017/18 ending stocks higher year-over-year to a total at 425 million bushels from 301 million in 2016/17. The stocks forecast is now up 124 million bushels YOY compared to up 129 million in the October WASDE. With the USDA production forecast down 6 million and the major use categories unchanged, the bottom-line reflected the adjustment to the production rounded to the nearest 5 million bushels. (There was a case to be made for an increase of 5 million bushels in the crush forecast based on USDA’s having to increase its product year crush forecast by 6 million bushels. By not making that change, USDA effectively lowered its crush forecast for the final 11 months of the 2017/18 soybean crop year forecast.) Stocks at 425 million were moderately higher than trade forecasts which had averaged around 420 million. The price range forecast was increased by 10 cents to $8.45 to $10.15 with a mean price forecast of $9.30. 

USDA updated its global supply/demand forecasts for 2017/18. Global production is forecast at 348.89 mmt, up from 347.88 mmt last month. The US forecast was lower, whereas foreign production was higher. We would note that the Brazil forecast was up 1 mmt but there were no changes to the production forecasts for Argentina, China and Paraguay. The total use forecast increased 0.59 mmt to 344.96 mmt. The stocks forecast was impacted by a 1.4 mmt increase in the carryin. That accounted for the majority of the increase of the ending stocks to 97.90 mmt from 96.05 mmt last month. Trade expectations were for lower global stocks month to month.

Soybean prices traded lower on the larger global stocks and smaller cuts to the US production and stocks forecasts than expected.

SOYBEAN PRODUCTS

SOYBEAN OIL

USDA’s 2016/17 soybean crush was revised to 1906 million bushels, up 6 million bushels from last month’s forecast ahead of the final crush report for 2016/17. Soybean oil ending stocks totaled 1.711 billion pounds, up 79 million pounds from last month.

In the U.S. outlook for 2017/18, there was the higher carryin discussed above. The previous production and crush forecasts were retained. Total supply increased 79 million to 24.516 billion. The separate use forecasts were unchanged. USDA forecast month-to-month ending stocks also up 79 million pounds to 1.616 billion, down 95 million year-to-year. USDA forecast cash prices ranging from 32.50 to 36.50 cents per pound, mean at 34.50 cents, and unchanged from last month.

USDA forecasts the global 2017/18 crush at 301.98 mmt, up from 301.25 mmt last month, and up from 288.53 mmt in 2016/17. USDA sees the global new-crop use increasing to 55.99 mmt from 53.62 mmt in 2016/17. In terms of global vegetable oil ending stocks, those project higher for 2017/18 at 19.89 mmt from 19.09 mmt year-to-year.

Soybean oil prices were moderately lower following the reports. The monthly adjustments did reflect more crush and more soyoil stocks, although those results included values released one week ago.

SOYBEAN MEAL

USDA’s 2016/17 soybean crush was revised to 1906 million bushels, up 6 million bushels from last month’s forecast ahead of the final crush report for 2016/17. Soybean meal ending stocks totaled 401,000 short tons, up 101,000 tons from last month. The crush yield for 2016/17 was 46.94 pounds, which made lots more sense than USDA’s October forecast at 46.99 pounds.

In the U.S. outlook for 2017/18, USDA left the crush forecast at 1940 million. The soymeal yield forecast is 47.52 pounds and that represents a substantial yield increase YOY. The domestic use forecast increased 100,000 tons and export forecast was unchanged. The price forecast was increased by $5 in the range of $295 to $335, mean $315.

USDA forecasts the global 2017/18 crush at 301.98 mmt, up from 301.25 mmt last month, and up from 288.53 mmt in 2016/17. USDA forecasts global soybean meal production at 237.12 million tonnes, which was up from 236.62 mmt last month, and up from 226.42 mmt in 2016/17. USDA sees the global 2017/18 use decreasing to 234.19 mmt from its forecast of 234.44 mmt last month, and up from 222.44 mmt last year.

Soybean meal prices followed soybeans and traded lower on the larger global soybean stocks and smaller cuts to the US production and stocks forecasts than expected.

 WHEAT 

U.S. 2017 wheat production was finalized in September at 1.741 billion bushels, so with no change in the import forecast, total supply is unchanged from last month at 3.071 billion bushels.

On the demand side, the only revision is to exports. USDA raised the export forecast by 25 million bushels to 1.0 billion. Strong export sales to Iraq were cited as the explanation for the increase. The additional exports were applied entirely to HRW wheat, resulting in lower ending stocks for that class. Only modest revisions were made to the other classes. For all wheat, the increased exports resulted in a corresponding cut in ending stocks now pegged at 935 million bushels, slightly below trade expectations for a decline of only a few million bushels. The season average price range is unchanged with the midpoint at $4.60 per bushel, up from $3.89 per bushel last season.

Global production increased 0.8 mmt from October to 751.98 mmt. Production increases from October are noted for the EU and Russia while slight reductions were made to Brazil and Pakistan. Global wheat use is now projected at 740.05 mmt, up from 739.63 mmt in October. Global ending stocks are projected at 267.53 mmt compared to 268.13 mmt a month ago and 255.61 mmt a year ago.

COTTON

Contrary to industry expectations for the USDA’s latest estimate of 2017 domestic cotton production (down 220,000 bales to 20.9 million), department analysts boosted their forecast 260,000 bales to 21.38 million from their October projection. That reflected unchanged planted and harvested acreage estimates (as usual), as well as an 11-pound rise in the yield forecast, now at 900 pounds per acre. This would represent a new record yield for the U.S.

USDA made no changes to its old-crop supply and usage estimates, so 2017/18 beginning stocks were unchanged. Thus, total U.S. cotton supplies rose with the production figure to 24.14 million bales. Indeed, the only other change to the various product flows was a 40,000 bale decline, to 190,000 bales on the ‘unaccounted’ figure, implying the department had found those supplies during the past month. The net result of those changes was a 300,000-bale increase in the domestic carry-out forecast to 6.1 million bales.

We at Doane were somewhat surprised that the USDA didn’t boost its 2017-18 export forecast, leaving it at 14.5 million bales instead. That matched industry estimates, but Doane expected a 300,000 bale increase, since the early-season pace of sales has greatly exceeded the rate needed to meet the USDA projection. We still expect upward revisions on future reports.

Despite their apparent bearish take on industry fundamentals, USDA analysts boosted their cotton price forecast for the current crop year from 55 cents to 65 cents in October to the 60 cent-66 cent range on today’s report. That means the midpoint value jumped from 60 cents to 63 cents per pound. Nevertheless, the production and carry-out increases, combined with the lack of a rise in exports, triggered a big drop in ICE cotton futures.

The losses may have been limited by USDA’s international results, which were generally supportive. USDA significantly boosted its cotton consumption estimates for both the 2015/16 and 2016/17 crop years, thereby reducing ending stocks for those years by 770,000 bales (to 95.91 million) and 900,000 bales (to 88.67 million), respectively. Of course, the 2016/17 reduction represented a commensurate drop in 2017/18 beginning stocks. When combined with another big increase in the usage forecast for this year, those results more than offset a 600,000-bale rise in the global production forecast, with the net result being a 1.5 million bale reduction in projected global ending stocks, now at 90.88 million bales.

The global situation may also benefit from the source of the added production. That is, while the U.S. output increase might easily go into the global market, expected production from other major exporting countries was trimmed 260,000 bales. That implies a commensurate dip in supplies readily available to the world market. Production in major importing countries rose 410,000 bales, with a 500,000-bale rise in Chinese output (now at 25 million) accounting for the difference.

The report obviously had a bearish impact on the cotton market, so the short-term outlook seems less than promising. But we at Doane see little reason to think U.S. export sales will slow significantly in the absence of a sizeable surge in the value of the U.S. dollar. Indeed, recent anecdotal reports indicate the current harvest is producing cotton of very high quality, which may actually boost export prospects. Ultimately, this suggests the market will rebound at some point in the days and weeks ahead.