In the grain trade, you hear the remark that someone is “talking their position.” This means that a conversation seems to be based not on the current consensus opinion of the market, but on what the speaker is actually trading. The speaker is verbally lobbying the listener on the opinion expressed by his actual market position as he is trading futures.
There are a lot of traders talking their positions right now. They are trying to justify what they have done when it may not agree with recent U.S. Department of Agriculture reports.
As I mentioned last week, the accepted wisdom is to not trade against the USDA reports, especially while they are fresh. These represent what the accepted knowledge is that traders are betting on.
Right now, however, I regularly hear the opinion that USDA is wrong about this or that, or that they seem to be juggling numbers to come out with a foreordained conclusion. As usual on the Chicago Board of Trade, “ya pays yur money and ya takes yur chance!”
Certainly, there have been surprises recently in the fundamentals we are supposed to trade. For example, yesterday I was told that USDA still is showing a soybean carryout at the end of the year as 300 million bushels.
This is a convenient number, somewhat near the assumed value for “pipeline supplies.” That is, it is the minimum we need for that little bit left in each processor or farmer bin. Yes, you say you are sold out, but you actually have a pile that is less than a semi-load, so you are just leaving it there.
In fact, it can be easily be argued that we will end up with more like 200 million and will be importing beans from Brazil into the Southeast this summer to keep crush going. That comes mostly because traders think USDA is too high on the yield estimate for this year’s crop, given the early development problems and the exiting drought.
Yes, we have gotten timely rains over the Midwest in the last two weeks, but there are a lot of acres out there that have been damaged, and we don’t know how much. And, August is not here yet. It is August weather that is most critical for bean yields, and right now, the market assumes we will have good weather, but traders are willing to bet on reduced yields at the drop of a hat.
The common idea among traders last week was that, we needed two sets of balance sheets for the crop. One was what we thought USDA would release, and one was what the actual production would predict.
There were two problems with that. One is that we don’t know what the production will actually be. The second was that USDA almost never changes yield projections in the July report. They haven’t done it since 2012.
Well, surprise, surprise! They did drop the yield to 177.5 bpa. That would still be a record for all time. However the trade average guess was 176.1 bpa, which would be a significant difference. If you look at the number the trade actually thinks we will get, and not what the USDA guess is, you might hear talk of 172 or 173.
The reality that we don’t know what the corn yield will be was demonstrated by my Monday morning conference call of Midwest producers and professionals of one kind or another. Most of the callers were grateful for significant rain the last two weeks which had the corn greened up and tasseling.
Most were saying that, nevertheless, they were dubious if they could hit trend-line yields because of previous damage, mostly from drought. Some also talked of seeing large areas of corn destroyed by hail, but with no ability to guess what the area was.
In fact, we normally have areas of drought damage, excess rain damage, hail damage and wind damage even in the best of years. That is the beauty of having American production spread over a large area. It is some of the difficulty of estimating crop size.
For all the criticism of the USDA, especially by some cynical farmers — you know who you are — who think USDA gets it wrong on purpose, what they are doing is amazing. If they turn out wrong, they make a big target to blame.
Having said all that, we should look at the numbers and the result of some of this speculation. December corn futures were up almost 20 cents last week. For a time July 17 we were almost 13 cents higher, but we closed down seven and three-quarters cents.
As I’m finishing this, just after 5 a.m. July 18, we are trading at $5.13, just about where we closed July 14. The ugly day was July 12, after the bearish USDA report, when we traded as low as $4.81.
So, the market has shrugged off the USDA numbers and is actually more than 30 cents above the post-report low. Remember, the market is still trying to digest the idea in the report two weeks ago that the corn acres were several million above what we thought.
A quick look at crop conditions. The U.S. has gained in condition ratings two weeks in a row. Ohio corn is rated 72% good and excellent, which leads the top 10 highest-producing states. The nation is rated at a total of 57%, up 2% for the week. Last year, we were at 64%.
Ohio soybeans are rated at 63% good and excellent. Ohio and Minnesota lead the ratings. The U.S. rating jumped from 51 to 55% this week, a huge change. This time last year the crop was at 61%.
The November soybeans got down to $13.25 just after the USDA report July 12, but ended up gaining 53 cents for the week, closing July 14 at $13.70 3/4. We are still working higher, trading at $13.88 as this was being being written at 5 a.m. July 18.
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