What Every Farmer And Commodity Trader Will Be Glued To Tomorrow at 830ET

Tyler Durden's picture

With drought conditions bad and getting worse and agricultural commodities 'stabilizing' at their multi-year highs, tomorrow morning could be the catalyst for the next leg in a global food inflation spike (and its accompanying deflationary impacts on economies). The USDA releases it August World Agricultural Supply and Demand Estimates (WASDE) at 830ET  - which is particularly important since it is the first survey-based estimates of the year. It would appear that while pre-positioning has slowed a little, sell-side analysts expect prices (and implied vols) for corn, soybeans, and less-so wheat to rise on the back of not just (dramatically) lower crop yields (in this first of the year survey) but overly optimistic harvested-to-planted estimates and demand limits. Ethanol demand destruction is also emerging as a consensus.

 

Goldman On WASDE Expectations:

We expect higher corn prices and soybean price outperformance

We forecast a US corn yield of 126 bu/ac and US corn production of 10,750 million bushels. As a result, we believe that ethanol demand destruction is necessary and our corn price forecast is based on the price of corn that pushes the cost of producing ethanol above the price of RBOB gasoline blendstock. Given our forecast for higher oil prices, this puts our 3-mo CBOT corn price forecast at $9.00/bu.

 

 

August weather is key to US soybean yields and recent rains will be beneficial to US soybean production. As we had intentionally left our US yield forecast at a high level of 39.5 bu/ac to allow for such an outcome, our US soybean outlook is unchanged. We expect that 2012/13 US soybean ending stocks will be at critically low levels: with the large shortfall in 2011/12 South American production, the global availability of soybeans will be limited until the next South American harvest, with the US the only supplier until then. As a result, we believe that higher new crop soybean prices will be required to limit demand in the coming months and our 3-mo forecast is $20.00/bu.

 

We forecast lower global wheat production and lower export surpluses given continued hot and dry weather conditions in key producing regions. However, global wheat inventories remain larger than corn stocks and we forecast that wheat feeding will be required to supplement corn and DDG use in the US and globally. As a result, we continue to forecast that US wheat prices will need to trade back near corn prices by next spring. A further deterioration in weather conditions, potential FSU export restrictions and pent-up import demand create risks that global wheat inventories decline even more than we expect and push wheat prices well above corn prices.

 

Hedging recommendations

Consumers: We forecast higher corn, soybean and wheat prices over the next 3 months given the severity of the current US drought, with our 6-mo price forecast also above the current forward curve. As a result, we recommend consumers lock in current prices as well as layer in upside calls to hedge against the higher prices that we forecast, especially for corn and soybeans. Although up since early July, implied volatility levels remain well below their previous peaks and still represent value especially if weather conditions deteriorate further.

Producers: Following the recent rally in corn, soybean and wheat prices, we recommend Southern Hemisphere producers lock in producing margins.

Morgan Stanley On WASDE Expectations:

We expect a bullish report for the grains with further downside likely for US corn and soybean yields, and shaky global wheat supplies.

Bullish corn, with entire 12/13 balance sheet in play. Armed with its first survey-based yield estimates of the year, the USDA is likely to reduce (dramatically) yield and production estimates for a second consecutive month. While we expect corn yields could easily come in below 130 bu/acre (our weather-driven models show 127 bu/acre), this will not in and of itself be bullish, with consensus already positioned below that level. Instead, we will be watch how the USDA handles the harvested to planted (H/P) ratio, currently at an above-average 92.2% (vs our recently-lowered 88.7%). Over the past 25 years, the 3 seasons with the worst yield disappointments saw H/P ratios fall at least 3% below average. With news already emerging of farmers cutting corn for silage a month earlier than usual and abandoning fields, we’ll be surprised if the USDA does not cut its optimistic H/P estimate.

 

To balance a production decline of up to 2 bln bu, the USDA will have to make large cuts to all line items. Ethanol demand will be the hardest line item to ration, in our view; accordingly we expect only a 200-300 mln bu reduction to the USDA’s current estimate of 4.9 bln bu. However, feed and export demand could each see cuts as large as 500-800 mln bu. Providing some offset, the USDA will likely lower 11/12 ethanol and export demand (by 50 and 100 mln bu, respectively) with the latest high-frequency data disappointing. Globally, we see little good news, with as much as 1 mln MT and 2.5 mln MT of downside to Russian and Ukrainian production estimates, respectively, as drought hammers those countries. We see upside to Brazilian 11/12 and 12/13 exports on the need to offset lost US supply, while China may well prove the one bright spot for global production, with as much as 2-3 mln MT of downside possible for 12/13 imports on stronger domestic supply.

 

Soybean production is likely to fare better than corn, though we still see the need for more demand rationing. With old-crop demand still running inline with last month’s expectations, we expect no changes to the 11/12 balance on Friday, leaving all of the focus on the 12/13 crop. The market has long understood that the soybean crop is more resilient than corn (and recent rains should shore up confidence that conditions can still stabilize). However, with the US soybean crop rated in the worst condition since 1988 (when soybean yields fell 20% YoY to just 27 bu/acre), we see the USDA’s current yield estimate of 40.5 as too high (our models show 38 bu/acre). As with corn, stories of failed soybean fields will likely increase the pressure to reduce the USDA’s elevated h/p ratio — currently pegged at 98.9%, vs our estimate of 98.2%. To offset weakness in US production, we see downside of as much as 200 mln bu to the USD’s 12/13 export forecast, balanced by a combination of higher exports from Brazil and a 1.5 mln MT reduction to Chinese 12/13 soybean imports. We see limited downside to US 12/13 crush, on the need to keep US soy meal and oil stocks above record-tight levels.

 

Expecting a bullish report for wheat, on faltering international production. Falling production in Russia and China — seen lower by 4 mln MT and 10 mln MT, respectively, from the USDA’s official estimates in the most recent Attaché dispatches — is likely to further support US wheat export demand. We would not be surprised to ultimately see US 12/13 exports lifted by 25 mln bu. However, the slow pace of US export sales MYTD, may keep the USDA on the sidelines this month. While we have raised our 12/13 all wheat yield estimate to nearly flat with the USDA, we continue to view its higher than average h/p ratio assumption of 87% as overdone, particularly given the decelerating pace of the winter wheat harvest.

Citi On WASDE Expectations

Given that large regions of the Midwest are now categorized as being in “Extreme” or “Exceptional” drought, we expect the USDA to significantly lower their July yield estimates of 146 bu/acre and 40.5 bu/acre for corn and soybeans, respectively. Citi’s commodity futures strategist currently estimates yields of 133 and 38, respectively, while on their 2Q conference call, AGU management indicated that they believe corn yields may be in the 120s. As a comparison, following the severest drought in recent history (1988), nationwide yields were ~25% below the trend yield at that time. A similar decline from the current trend would point to a corn yield in the low 120 bu/acre range. At this yield corn demand destruction is necessary, with ethanol and feed usage at risk.

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SheepleLOVEcheddarbaybiscuits's picture

Where the hell is Beaks?!

jonjon831983's picture

They switched the reports! Get your ass back in there and "SELL SELL SELL!!!!"

Buckaroo Banzai's picture

Turn those machines back on!!!!

Biggvs's picture

Agreed, forget about corn prices. It's frozen concentrated orange juice we need to worry about.

Pubcoceo's picture

Where's my limo where's my ho's ...awesome comment dude

pdl's picture

One minute you're up half a million in soybeans and the next - boom!  Your kids don't go to college and they've repossessed your Bentley.  Are you with me?

The Monkey's picture

We're getting some of the blow off characteristics of another nasty bear market.

When the central banks punch the gas, prices will soar.

neidermeyer's picture

I just returned from Iowa and western Illinois ,, Corn is TOAST ... and although the soybeans look healthy the plants HAVE NO BEANS...

neidermeyer's picture

I just returned from Iowa and western Illinois ,, Corn is TOAST ... and although the soybeans look healthy the plants HAVE NO BEANS...

roadsnbridges's picture

It's GS, fade it?

Where the flock is Stolper when you need him.

Seize Mars's picture

I think, as mentioned around here recently, that the drought is really nice cover for money printing. When the food price shock really hits hard, they point at the weather. Meanwhile the financial thuggery goes into high gear.

What a nightmare.

roadsnbridges's picture

wtf?

Yeah, let's double food inflation!

El Oregonian's picture

Dried powdered dirt sandwiches for all the sheeple, then after lunch, dirt naps for everyone else going into dinner! How does that sound children? YEAH!!!

JPM Hater001's picture

Mars- did we ever battle in unreal t?

LawsofPhysics's picture

Don't forget bioethanol in gasoline is now mandated at 10% for many states, another good intention that will now bite everyone in the ass.

fuu's picture

I could not find the crop report released early anywhere on the USDA website, but I did find next months labor report.

roadsnbridges's picture

Word has it, it will be released 15 hours late.

Just in time for the weekend.

Did you happen to catch the NFP for Oct?

Dr. Engali's picture

I say the trade is frothy. Sell on the news.

scatterbrains's picture

Or did Oblahblah see the report and it's ugly and so out of frustration lashed out at crude speculators because the fed can't print and if Rut2k tanks so does his re-election chances?

Pubcoceo's picture

Thats ok the plunge team will just nuke someone's algo

buzzsaw99's picture

feast or famine banksta gonna bank.

Lost Wages's picture

Corn is the new Gold.

Hopium Dealer's picture

Nothing Monsanto makes will ever be equal to Gold

roadsnbridges's picture

Maybe not.  They were successful in getting Triple Strike (weed killer) banned.

LMAOLORI's picture

 

 

"Corn is the new Gold."

Jim Rogers said pretty much the same thing he's been preaching about buying farmable land for a while now even before the food riots. When you think about it with how large the world's population is in a sense Corn will be like Gold it's used in a lot of things. 

 

 

$10 Corn Is Coming, Top Fund Manager Says

 

youngman's picture

I just sold a farm...small 90 acres..but in Iowa...good farm land.....for $12,000 and acre....now folks....that is frothy....its all into gold now....lol

holdbuysell's picture

Somebody check the BLS website...maybe they're already posted. /sarc

gookempucky's picture

 

With only 2/3 the energy of gasoline, ethanol costs more per mile The energy of ethanol relative to gasoline
 A.  76,000  = BTU of energy in a gallon of ethanol
 B.  116,090 = BTU of energy in a gallon of gasoline
 C.  .655 = 2/3 = GGE of energy in a gallon of ethanol.  A / B. (GGE =energy in a gal. of gas)
 D.  1.53 = Gallons of ethanol with the energy of 1 gallon of gasoline.  D = B / A.

The basic story on ethanol mileage and cost

Some Ethanol proponents claim it doesn't hurt their mileage, but this goes against physics, and you will not find the ethanol lobby making such fraudulent claims--they could be sued. But just to be sure, zFacts analyzed all of EPA's ethanol mileage tests for one year and, big surprise, ethanol gave exactly 2/3 the mileage of gasoline. Now there is one possible loophole and it is used by a Swedish sports car, the SABA 9-5 Bio-power. Here's the trick. Higher compression ratios make engines more efficient, and because of its high octane, ethanol can take a higher compression ratio. The Bio-power is turbo charged and when it uses E85 it switches to a higher compression ratio. It still gets fewer mpg on ethanol, but it does a little better. Unfortunately it's very expensive. An easier approach is to use diesel, which also gives you a high compression ratio and mileage as good as a hybrid at less cost. That's why all big trucks are diesel. The USDA tells us that ethanol cost 57¢ more per gallon on average over the last 25 years (and it still does). Put that together with the fact that it takes 1.53 gallons to equal a gallon of gasoline.
roadsnbridges's picture

Nice try, but you can't baffle me with facts.

- your local Lib

granolageek's picture

Bullshit. Ethanol is totally a red state corparate welfare scam. Own your own slimeballs dude.

deflator's picture

 Everyone knows ethanol is inferior to gasoline in every way. We are using corn based ethanol because we can produce corn in, "abundance". Abundance is one othe most important factors in determining the commercial viability of an energy source. What everyone does not know is that...

gookempucky's picture

What everyone does not know is that...

Population growth, if it continued long enough, would also lead to unavoidable scarcity. exponential growth in human population has the capacity to overwhelm any finite supply of resources, even the entire known universe, in a remarkably short time. For example, if the human population continued to grow indefinitely at its 1994 rate, in 1,900 years the mass of the human population would equal the mass of Earth, and in 6000 years the mass of the human population would equal the estimated mass of the observable universe[10] Although this would imply the invention of faster than light travel, necessary for humanity to spread throughout the universe as fast as population growth, even at lower growth rates these levels would still be reached in readily imaginable times. So a plausible post-scarcity scenario must imply zero population growth or relatively low population growth.

Hows that abundance working out for ya ?

centerline's picture
  1. I will be the first to give you the green arrow up.  This is the real issue folks.  Pay attention.  The financial side to this is just part of the show.

 

flacon's picture

Somebody in the 1970's already thought of that - they decided to build a huge stone henge monument and called it the Georgia Guidestones. Capping the earth's population at 500,000,000. 

roadsnbridges's picture

If we could harness the power of Lib stupidity,  we'd have 500 mpg.

Talk about abundance!

deflator's picture

    Lib stupidity? You mean liberal or libertarian? not that it matters

"Talk about abundance!"

Interesting time in history that we are living in. If you were a spark and had a choice what time in history to be born human this would definitely be a strange choice.

 A point in time where the Earth is providing an abundance so immense that you would think that just being born in this period in time would be a shoe in for a happy life.

 

DeFeralCat's picture

I agree that being born now is special. Can you imagine that all the people that came before us could not watch free porn on the internet? What a harsh existence!

Disenchanted's picture

 

 

 A point in time where chemicals and petroleum based energy products are providing an abundance so immense that you would think that just being born in this period in time would be a shoe in for a happy life.

 

fixed...

 

Shut off the fertilizers, nitrogens, anhydrous ammonias, the diesel fuel used to till, plant and harvest the huge acreage in corporate farming, gmos, etc., and see what happens to that abundance. Yes the chemical/petroleum based abundance works great, until it doesn't. What's the shelf life of it...until your soil is ruined?

Bull_Colapse's picture

All true, but ethanol is greener so makes you feel better even if you do spend a bit more

scatterbrains's picture

98 TDI Diesel getting 49 mpg's bitchezz!  oh plus I can always top off with heating oil left abandon in the homes of Fema camp refugees.

LawsofPhysics's picture

The MPG was much higher until they put all that "clean diesel" technology on the TDI. Still looking for another older one.

disabledvet's picture

i know when i've got high octane corn syrup under foot it's PEDAL TO THE METAL BOYZ!

Nobody For President's picture

Officialdom calls ethanol and 'additive', but it is actually an adulterant.

DeFeralCat's picture

I am going long the Jolly Green Giant.

deflator's picture

long farmland with water rights bitchez..