On Thursday, October 12, the U.S. Department of Agriculture released its October World Agricultural Supply and Demand Estimates report. All market participants in the world of agricultural hold their breath at the time of the monthly release because the report is the gold-standard when it comes to describing the state of the grain and other agricultural markets. Even the slightest changes in crop yield, inventory, or demand dynamics for the markets in corn, soybeans, wheat, cotton, meats and other agricultural commodities can cause wide price volatility in the aftermath of the monthly report.
The October missive is particularly important to markets because it tends to deal in reality as concrete data towards the end of harvest season provides the USDA with the tools to provide the various markets with a robust look at the fundamental state of the agricultural markets. One constant over recent years has been the rise of demand based on population and wealth growth around the world. However, each year it is the weather and growing conditions across the fertile regions of the United States and world that determines the ultimate path of least resistance for prices.
The October WASDE caused fireworks in some markets and not much activity in others. Let’s take a look at what the USDA said in the report and the price action that followed.
As the chart of November soybean futures shows, the oilseed put in a bullish key reversal trading pattern on October 12 as it rose above technical resistance at $9.87 per bushel. Beans traded to a high of $9.9775 and closed the session at the $9.92 per bushel level, 26.75 cents higher on the session. The USDA told markets:
U.S. oilseed production for 2017/18 is projected at 132.3 million tons, down 0.5 million from last month mainly on lower sunflower seed, canola, and cottonseed production. Soybean production is forecast at 4,431 million bushels, nearly unchanged from last month with higher harvested area offsetting lower yields. Harvested area is projected at a record WASDE-570-3 89.5 million acres, up 0.8 million. The soybean yield is forecast at 49.5 bushels per acre, down 0.4 bushels. With lower beginning stocks, soybean supplies for 2017/18 are projected down 44 million bushels. With use projections unchanged, ending stocks are projected at 430 million bushels. If realized, ending stocks relative to use would be the highest since 2006/07. The 2017/18 U.S. season-average soybean price is forecast at $8.35 to $10.05 per bushel, unchanged from last month. Soybean meal and soybean oil price projections are also unchanged at $290 to $330 per short ton and 32.5 to 36.5 cents per pound, respectively. Global oilseed production for 2017/18 is projected at 577.0 million tons, down 1.6 million as reductions for soybeans, rapeseed, and sunflower seed are partly offset by increases for cottonseed and peanuts. Global soybean production is projected down 0.6 million tons to 347.9 million on lower forecasts for Russia and Ukraine. Higher production for China and Mexico is partly offsetting. Sunflower seed production is also lower for Russia and Ukraine on lower yields. Rapeseed production is lowered for Australia where yields are impacted by below-normal rainfall. Global oilseed exports for 2017/18 are down 0.4 million tons to 173.9 million on lower soybean and sunflower seed exports. Soybean exports are lowered for Ukraine while sunflower seed exports are lowered for Ukraine and Russia. Lower rapeseed exports for Australia are offset by higher exports for Ukraine. Global oilseed ending stocks for 2017/18 are projected down 1.6 million tons from last month to 107.9 million mainly reflecting back year adjustments that reduced soybean carryin for Brazil and the United States.
The bottom line was that the USDA lowered U.S. and global oilseed production, crop yield, and ending stocks sending the price of the soybean futures higher.
As the daily chart of CBOT corn futures illustrates, the price rallied in the aftermath of the WASDE report but settled at $3.49 per bushel which was equal to the previous day’s high. The USDA said:
This month’s 2017/18 U.S. corn outlook is for larger production, increased feed and residual use, and nearly unchanged ending stocks. Corn production is forecast at 14.280 billion bushels, up 96 million from last month. Corn supplies are higher, as a larger crop more than offsets a reduction in beginning stocks based on the Grain Stocks report. Projected feed and residual use is increased 25 million bushels. With supply and use changes essentially offsetting, corn ending stocks are up 5 million bushels from last month. The projected range for the season-average corn price received by producers is unchanged at $2.80 to $3.60 per bushel. WASDE-570-2 Grain sorghum production is forecast down from last month, as a 2.4-bushel per acre increase in yield to 72.2 bushels per acre is more than offset by a reduction in harvested area. Barley and oat production estimates are updated based on the Small Grains report. Global coarse grain production for 2017/18 is forecast up 2.8 million tons to 1,319.4 million. The 2017/18 foreign coarse grain outlook is for greater production, consumption, and reduced stocks relative to last month. Foreign corn production is forecast higher, with the largest reductions for Russia, Ukraine, Ethiopia, and Tanzania more than offset by increases for a number of countries including Nigeria, Turkey, and Mozambique. The projected corn yields for Russia and Ukraine are reduced based on reported harvest results to date. Historical revisions are made to Nigeria’s corn, sorghum, and millet production estimates to better reflect statistics published by the government. Corn exports are raised for Mexico and Argentina, with largely offsetting reductions for Russia and Ukraine. Argentina’s 2016/17 exports are lowered for the local marketing year beginning March 2017 reflecting a slower-than-expected pace of exports to date. Projected 2017/18 food, seed and industrial use for corn in China is raised based on recent trade data indicating a higher-than-expected level of corn product exports. Foreign corn ending stocks for 2017/18 are down from last month, mostly reflecting declines for China and Mexico that are only partially offset by increases for Argentina and Turkey. Global corn stocks, at 201.0 million, are down 1.5 million from last month.
A small drop in global stocks from the previous month resulted in a modest rice in the price of corn.
Wheat futures actually wound up lower on the session after an initial rally following the release of the report. December CBOT wheat closed on October 12 at $4.3050 down 2.75 cents on the session. Source: CQG
The USDA offered the following synopsis of the global wheat markets:
Projected 2017/18 U.S. wheat supplies are decreased modestly this month as reduced beginning stocks are partially offset by slightly higher wheat production. Beginning stocks were revised downward in the latest NASS Grain Stocks report while wheat production increased in the NASS Small Grains Annual Summary to 1,741 million bushels. Although all wheat production increased minimally from last month, the by-class changes are relatively more significant as larger Durum and Hard Red Spring production more than offset declines in Hard Red Winter and Soft Red Winter. Projected 2017/18 feed and residual is reduced 30 million bushels this month to 120 million as the NASS Grain Stocks report indicated lower-than-expected June-August disappearance. Additionally, projected 2017/18 U.S. corn supplies are the second highest on record, which is expected to dampen wheat feed and residual use for the rest of 2017/18. The other wheat use categories are unchanged this month and projected 2017/18 ending stocks are higher at 960 million bushels but still well below last year’s 1,181 million. The projected 2017/18 season-average farm price is unchanged this month at the midpoint of $4.60 per bushel but the range is narrowed 10 cents on each end to $4.40 to $4.80. Global 2017/18 wheat supplies are increased, primarily on higher production forecasts for Russia, EU, and India more than offsetting a decline in Australia. Based mainly on harvest results to date, Russia’s 2017/18 wheat production is increased 1.0 million tons to a new record of 82.0 million tons. This is well above last year’s previous record of 72.5 million tons. EU wheat production is raised 2.2 million tons to 151.0 million, largely on higher production in France. Australia’s wheat production is reduced 1.0 million tons to 21.5 million on persistent dry conditions in most of eastern Australia. This would be Australia’s lowest wheat output since the 2008/09 crop year. Foreign 2017/18 trade is fractionally higher this month as reduced exports by Australia are offset by increased exports from Canada. Projected imports are lowered for India and Turkey as increased 2017/18 production for both countries is expected to reduce import needs. Total world consumption is projected higher, primarily on greater usage by India, EU, and Russia on their increased supplies. Projected global ending stocks are nearly 5.0 million tons higher this month at 268.1 million, which is a new record.
When it comes to wheat, the USDA raised their projection for ending stocks which weighed on the price of the grain.
Cotton and FCOJ
The daily chart of ICE cotton futures shows that the price of the fluffy fiber fell and closed Wednesday’s session at 67.84 cents per pound down 0.89 cents on the day after the USDA told the market:
The 2017/18 U.S. cotton supply and demand estimates show lower production, exports, and ending stocks relative to last month. Production is reduced 643,000 bales, largely in Texas and Georgia. Domestic mill use is unchanged from last month, but the export forecast is reduced 400,000 bales to 14.5 million, due to reduced U.S. production and strong competitor shipments. Ending stocks are forecast 200,000 bales below the previous month’s forecast. The resulting stocks-to-use ratio of 32.5 percent is virtually unchanged from the previous month’s forecast, and the highest since 2008/09. The forecast range for the marketing year average farm price is 55.0 to 65.0 cents per pound; the midpoint of 60.0 cents is unchanged from the previous month’s projection. The global cotton supply and demand forecasts for 2017/18 include relatively small increases from the previous month for production, consumption, and trade. Production is raised about 100,000 bales as larger expected crops in Argentina, Brazil, and Greece more than offset the reduction in the forecast for the United States. Vietnam is the primary driver behind a 250,000-bale increase in projected world consumption, while a 440,000-bale increase in projected 2017/18 world cotton trade reflects increases in India, Australia, and Brazil that more than offset lower expected U.S. exports.
The USDA reduced U.S. cotton production and ending stocks, but increased global production projections and the price moved lower.
As the daily chart of FCOJ futures highlights, the price dropped in the aftermath of the report and closed at $1.5890 down 3.7 cents on the session. The USDA confirmed to markets that Hurricane Irma wreaked havoc on Floridian groves and the U.S. crop is likely to be the smallest since 1947. The yield number was the lowest since 1942. However, FCOJ futures had already rallied to prices north of $1.60 per pound and the market had anticipated an even worse report so the price moved lower in the wake of the release.
December lean hog futures put in a bearish key reversal trading pattern on the daily chart on Thursday, October 12, and closed the session at 61.625 cents per pound, 0.875 cents lower on the day. When it comes to the animal protein markets, the USDA told markets:
The forecast for 2017 total red meat and poultry production is raised from last month as higher broiler and turkey production more than offset fractionally lower beef and pork production. Beef production is reduced from the previous month largely due to lower expected fourth-quarter carcass weights. The pork production forecast is lowered on smaller-than-expected third-quarter commercial hog slaughter which more than offset higher expected second-half carcass weights. The broiler production forecast is raised on expectations of increased slaughter later in the year based on hatchery data. The turkey forecast is increased as higher third-quarter slaughter more than offsets expected declines in fourth-quarter slaughter. The 2017 egg production forecast is raised from last month on higher hatching egg production. For 2018, the total red meat and poultry forecast is raised from the previous month as higher expected beef and pork production more than offset declines in turkey production. Beef production is little changed from last month although first half production is lowered as pasture conditions are expected to slow the pace of placements in the latter part of 2017. However, heavier carcass weights are expected to offset a portion of the decline. Pork production is raised from last month on higher slaughter. In the Quarterly Hogs and Pigs report, released September 28, producers indicated they farrowed about 2 percent more sows in June-August and intend to farrow approximately 1 percent more sows over each of the next two quarters. With larger pig crops in the second half of 2017 and into 2018, pork production is forecast higher. The 2018 broiler and egg production forecasts are unchanged from the previous month. Turkey production forecasts for 2018 are lowered on slow recovery in demand which is expected to dampen the pace of expansion. Beef import forecasts are raised in 2017 and 2018 on increased shipments of processing beef from Oceania. The 2017 and 2018 beef export forecasts are raised on strong demand in a number of key trading partners. Pork imports for 2017 and 2018 are raised from last month. The 2017 pork export forecast is lowered from the previous month on recent trade data, but no change is made to the 2018 export forecast. Annual broiler, turkey, and egg export forecasts are unchanged. Cattle price forecasts are unchanged for 2017 and 2018. Hog price forecasts are lowered for the last quarter of 2017 and into 2018 on larger supplies and pressure from abundant supplies of red meat and poultry. The annual broiler price is forecast slightly lower for 2017 but is unchanged for 2018.
It appears that the meat markets were hoping for better news than the USDA delivered as prices were unable to climb above the highs. We could see a move to the downside, particularly in the lean hog futures market as it put in a bearish technical pattern following the release of the WASDE report on Thursday.
The October USDA report is now in the books and in coming months the WASDE will just refine and alter numbers based on final data through the rest of this harvest season. Each year is always a new adventure in the agricultural markets as weather conditions and crop diseases are the ultimate determinants of the path of least resistance for prices on the supply side of the fundamental equation in these markets. When it comes to demand, a growing world continues to require ever-increasing amounts of agricultural commodities each year which always puts the market at risk of price spikes when supply side issues present themselves.
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