Perspective: Mid-Day Commentary for November 29

By: Arlan Suderman, Chief Commodities Economist

Tue, 29 Nov 2022, 16:27

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

November 29 - Hopes for a more open China boosted both the stocks and commodity sectors to start trade today, although that strength in the equities has since dried up. Even so, we continue to see modest tail winds for the commodities as we approach midday. The VIX is trading near 22, while the dollar index is trading near 106.6. Yields on 10-year Treasuries are trading near 3.72%. Crude oil prices are modestly higher, as are most of the grain and oilseed prices. We're rapidly approaching the end of the month, resulting in some position squaring. Traders continue to monitor developments in China, while also watching legislation moving through Congress that could help to avoid a U.S. rail strike. Otherwise, we're in that holiday malaise period between Thanksgiving and Christmas when fundamental news tends to be slow, allowing the markets to drift. The livestock markets are generally quietly higher as well.

Next week's USDA monthly WASDE report is not expected to change the size of the 2022 U.S. crops. Rather, USDA NASS is busy accumulating data to release its "final" U.S. production estimates for the 2022 crop year on January 12 - although crop sizes can still be changed as late as September 29th of next year. The trade assumes that we pretty much "know" the size of the U.S. corn and soybean crops following USDA's November crop report, and there is some logic to support that. The bulk of the crops were already harvested when the November reports were released, so one would assume that USDA had good data in hand, and that's largely true.

But what does history tell us? USDA tells me that its January production estimates based on its various surveys are the ones that it has the greatest confidence in each year. USDA conducts extensive producer and elevator surveys to go along with the field sampling that it did throughout the fall to arrive at the production estimates. This typically results in adjustments to both its yield and harvested acreage estimates that go into deriving its final production estimates. So how do those estimates compare to its November estimates? The graphic below shows a history of the past three decades of "final" production estimates minus USDA's November production estimates. Note that the size of the corn crop increased by 189 million bushels for the 2009 crop, which was the only time it was upwardly adjusted by more than 100 million bushels. Upward adjustments were usually much smaller. That would suggest that the odds of a bearish upwardly revised production estimate would be rather low, based on history. However, downward adjustments to production tend to be much larger when they occur, including as much as a 325 million-bushel cut in the 2021 crop in January. In fact, production cuts of 100 million bushels or more happened eight times over the past three decades after the November report. This leaves the corn market a bit more vulnerable to bullish surprises on the production side. Both upward and downward production estimates exceeding 40 million bushels are more common for soybeans. It's interesting to note that we saw a string of 7 downward adjustments from November to USDA's final production estimates from the 1995 crop through the 2001 crop. Then we saw upward adjustments for 10 of the next 13 years. Finally, we've flipped back to see downward adjustments after November for 5 of the past 7 soybean crops.

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