USDA Caught the Trade By Surprise Yesterday

Grains resumed their slump overnight following yesterday’s sharp rally in beans and modest bump in wheat prices buoyed by USDA data. In outside markets, crude oil and the US dollar fell in the night session while US equity futures were trying to hold on to slim gains.

USDA caught the trade by surprise yesterday when it trimmed US soy output on lower acres and yield forecasts. The net result was a 54 MB drop in production which cut ending stocks from 480 MB last month to 420 MB this month. USDA also dropped their US corn yield and acres forecast, helping lower production by a slim 78 MB.

However, on the bearish side, the Quarterly stocks report showed bigger than expected corn and wheat inventories, which implied lower feed use than what USDA had been projecting. Dec 1 stocks implied 1st quarter (Sept-Nov) U.S. corn feed/residual usage at 2.280 billion bushels, up just 4.6% from last year’s 2.179 billion. Corn for feed use was dropped by 50 MB to 5,600 which still reflects a 9.1% annual increase over 2015, while Q1 feed use was up only 4.6%. Wheat feed use was also lowered by 35 MB to 225.

The only bright spot on wheat was the steeper than expected drop in US winter wheat plantings, plunging 3.8 million acres over last year while the trade expected only a 2 million acre cut. This would be the lowest plantings in 107 years. Nonetheless, global supplies continued to mount with world carry-out ballooning to 252 MMT up from 251 MMT last month on increased production in Russia and Argentina.

Going forward, the trade will continue to focus on SA’s growing season. Portions of central Argentina will still be affected by heavy rain this
weekend and more flooding is probable. But, Brazil continues to see nearly ideal conditions. Also, with wheat plantings “known” traders will start to conjecture about US spring acres, with farmers believed to be heavily biased towards 4 to 6 million more acres of soybeans in 2017.

The risk of trading futures, hedging, and speculating can be substantial. Grain Hedge is a Branch of Foremost Trading LLC (NFA ID: 0307930)

—Kevin McNew