(This column was written by a Reuters market analyst. The opinions expressed are his own.)
By Gavin Maguire
CHICAGO, Nov 4 (Reuters) – Grains traders are bracing for supply-side developments to take top billing in this week’s key U.S. Department of Agriculture crop report, and most expect to see a steep jump in supplies compared to the last projection, which could potentially set off a new wave of price weakness in corn and soybeans.
But while the update from the USDA due at 12 p.m. EST on Nov. 8 – the first since September following last month’s government shutdown – will no doubt feature some upside revisions to production estimates, there are also likely to be some notable increases to usage projections that may substantially offset the supply advances reported.
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U.S. soybean futures fell to a 1-1/2 week low on Tuesday as China continued to shun purchases from the United States and as forecasts for improved rains in the coming days reinforced expectations for a sizeable Midwest harvest.
That could potentially help the grain and oilseed arenas find some price support following their recent downward grinds.
SUPPLY OBSESSED
As the U.S. corn and soybean harvests have wrapped up in recent weeks, a majority of agriculture traders have remained predominately focused on the likely yield and total crop supply estimates due out of the USDA.
Private estimates and anecdotal farmer reports suggest the overall quality and quantity of U.S. corn and soybean crops is higher than had been anticipated in late summer, suggesting that there is a strong likelihood that the USDA will increase its overall supply projections.
The USDA’s own crop condition ratings revealed an improvement to both corn and soybean conditions following the shutdown’s data gap, further heightening expectations that the USDA will boost supply forecasts in its next release.
And the sense of surplus supplies is not confined only to the United States. Farmers in South America have enjoyed broadly crop-friendly weather conditions of late to raise expectations of a production increase from that region as well.
Combined with bearish technical chart patterns in both corn and soybeans lately, this prospect of a dial-up in supply projections has served to weigh on prices and sentiment lately, and prepared many market players for a fresh round of price weakness once the USDA release hits the wires on Friday.
DON’T OVERLOOK DEMAND
As significant as these supply updates will be, it’s important for traders to remain mindful of the fact that demand will become the chief driver of market bias and sentiment once the U.S. harvest has been fully factored in and the South American crops enter their developmental phase.
In addition, a stretch of robust export sales along with an increase in projected profit margins at a number of key grain and oilseed consumers look set to justify broad increases in grain and oilseed consumption projections over the coming months, which could well be revealed by the USDA as early as Friday’s report.
At the very least, the USDA will likely upwardly revise its 2013-14 U.S. corn and soybean export estimates, as both are running at close to their fastest pace in years. U.S. wheat export estimates will also likely see an upward tweak.
U.S. corn demand from the ethanol sector is also a candidate for upward revision given the strong output pace in recent weeks driven by the improved operating margins of the industry thanks to prices at three-year lows.
Feed demand from the livestock industry is also expected to pick up going forward as low corn prices help to improve operating margins in the hog, poultry and cattle industries.
The USDA may not feel compelled to aggressively lift its usage estimates all at once next week, and may instead take a more piecemeal approach to adjusting demand, beginning with export projections.
But it would certainly be justified in acknowledging the improved demand potential from a broad number of grain and oilseed users, which may be enough to offset a large proportion of any supply-side increases and set the stage for a bottoming in corn and soybean prices following the recent spell of weakening values and subdued trader sentiment.
