2/21/2014

Government Reports Are Bullish And Bearish, Or Neither - Farm Futures

Bryce Knorr

Government Reports Are Bullish And Bearish,

Or Neither
Market seems to mostly ignore USDA data to focus on charts and weather.
Published on: Feb 14, 2014
Politicians are often accused of talking out of both sides of their mouths. USDA data released in
the second week of February seems guilty of the same practice. In the end traders gave short
shrift to the numbers, trading their preferred conversation about weather and technical price
movements on commodity charts.
USDA first supplied a friendly surprise for corn with its Feb. 10 monthly update to global
production, supply and demand. The agency trimmed its forecast of Aug. 31 inventories by 150
million bushels, citing better export sales. The news continued the series of lower estimates from
the government, but prices mostly just consolidated previous gains. March futures held around its
100-day moving average.
Alas, what USDA gave it seemed to take
right back with its 10-year baseline
estimates released Feb. 13. This long-term
outlook is prepared as a part of the
federal governments budgeting process.
In includes forecasts of acreage,
production, demand, ending stocks and
prices, which serve as a platform for
estimating farm program spending. The
baseline showed farmers planting 93.5
million acres of corn in 2014, with ending
stocks swelling to a mammoth 2.6 billion
bushels.
These forecasts were based in part on USDAs November crop report, so they were woefully out of
date. But they served as a reminder that even the updated old crop forecasts show ending stocks
of nearly 1.5 billion bushels, a lot of corn.
For soybeans, the Feb. 10 report was bearish. USDA kept its ending stocks forecast unchanged at
150 million bushels, despite total export commitments already running 5% ahead of the total
predicted for the entire marketing year. USDAs baseline for beans three days later showed even
larger carryout, 170 million bushels of old crop and 203 million for 2014. But some traders honed
in instead on the agencys acreage estimate. At 78 million for 2014, it was up to 4 million or more
below others circulating in the trade.
March soybean futures traded daily reversals higher and lower fiver days in a row in the week of
the reports, at one point moving above December highs, which triggered additional buying. USDA
reports are one thing, but what traders really like are break outs on price charts to stimulate their
appetites. Uncertainty about weather in South America kept the pot boiling, though overall
production still looks good.
The agency updates the 2014 forecasts Feb. 20-21 at its annual outlook conference in
Washington. That could be the rubber match in this best-of-three numbers contest.
Corn prices are consolidating 25 cents off January lows, thanks to supplies that are not quite a
burdensome as previously expected. Lower corn production in South America this year should
mean less competition this summer for U.S. exporters, and end users are snapping up grain at low
prices.
At the same time, theres nothing to suggest this buying is anything more than bargain hunting.
U.S. farmers still appeared poised to plant a lot of corn this spring, so only weather threats appear
likely to cause much excitement over the next six months.
Growers should continue to whittle away at remaining old crop inventory and get started on new

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2/21/2014

Government Reports Are Bullish And Bearish, Or Neither - Farm Futures

crop pricing too. It appears the average December futures price for February, used to determine
the Revenue Protection base, will be between $4.55 and $4.60. Coupled with a good backstop
from the new Agriculture Risk Coverage feature in the new Farm Bill, this should pretty much
ensure the average grower of breaking even, for 2014 at least, if trend-adjusted RP at 85% is
purchased and 35% of production is priced at current levels or better.
Soybeans are a tale of two crops, old and new. Strong demand keeps potential for a shortage of
old crop inventory in play, as long as China doesnt cancel too many of its previous purchases.
New crop prospects are far less bright, because farmers are still likely to plant 80 million acres or
more this spring.
As a result, getting price protection on 2014 production, and buying up crop insurance coverage
to 85% of trend adjusted yield is prudent. The RP base price, likely to come in between $11.15
and $11.25, will; provide plenty of upside insurance if prices keep rising. But the new ARC
program isnt as generous for soybeans for 2014 and 2015 as it is for corn. Likewise, RP doesnt
offer as much downside protection if the U.S. raises a bumper crop this year.
Wheat prices have quietly generated some good gains over the past month. In fact, while corn
and soybeans get a lot of attention, wheat could be the first to put in a bottom from this
downturn. Low prices are stimulating demand and weather remains a threat in key growing
regions, including the U.S.
But turnarounds in the wheat market usually dont pop up overnight. They take time to develop.
This means growers should keep their prospects in check. Start by making sure 2014 crop winter
wheat gets priced on rallies over the next two months. Futures are still 50 to 75 cents below crop
insurance guarantees, so a scale up approach is best. Spring wheat growers have a more difficult
task because their base price being set now for crop insurance wont be as profitable it may only
be around $6.35 to $6.40 Minneapolis September. The new Farm Bill also doesnt offer as much
backstop for wheat.
This means some producers may decide to plant other crops as well, especially if the long winter
delays seeding. That could set the stage for rallies later in the spring.

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