Perspective: Mid-Day Commentary for May 13

By: Arlan Suderman, Chief Commodities Economist

Fri, 13 May 2022, 16:31

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

May 13 - Fears eased a bit on Wall Street today, with this week's round of inflation data behind us. Stocks rallied sharply following the recent collapse seen over the past week plus. The VIX is poised to close below 30 for the first time since May 4th today. The dollar index is easing back to trade near 104.5, after hitting a fresh 19-year high above 105.0 earlier this morning. Yields on 10-year Treasuries are trading near 2.93%. Crude oil prices are nearly 4% higher, while the Ags are mixed going into the weekend. Wheat prices pulled back in some pre-weekend profit taking after surging the daily limit higher following yesterday's USDA crop report, which allowed corn prices to do the same. However, the soybean complex saw strong gains today as USDA tightens old-crop stocks and China buys more beans.

I follow a lot of USDA tendencies. It helps me to anticipate what USDA may do. Sometimes I'm surprised, like when USDA broke tendency and lowered its corn yield yesterday. I agreed with the move, but I was surprised at the timing. That was something that I would have expected USDA to do in its June report. Another strong tendency of USDA's is to overstate new-crop soybean ending stocks when it releases its first balance sheet for the next marketing year in its May WASDE crop report each year. The graphic below looks back at the past quarter century of changes in USDA's soybean ending stocks estimate from its initial May crop report to the final number 17 months later. Two things jump out at you looking at this graphic. First, the big exception in the 2018-19 marketing year when ending stocks grew by 498 million bushels from the initial estimate. Two factors played into that anomaly - the trade war with China and China's battle with African Swine Fever that slashed demand.

The other factor that stands out is the overwhelming majority of years that final stocks end up below USDA's initial May new-crop estimate. Two factors can play into that - supply and demand. As for supply, USDA's production estimate ends up being larger than the final crop size an equal number of times to when it is smaller. So that's not really the reason. Rather, it has a strong tendency to under-state export demand, which is usually connected to under-estimating Chinese demand. USDA current pegs this year's Chinese demand for soybeans at 108.72 million metric tons, down 4 mmt from the previous year due to lockdowns and poor feeding margins for hogs. It projects an increase of nearly 7 mmt for the next marketing year to 115.59 mmt. The next question then is, where will it originate those soybeans from in the 2022-23 marketing year. I'm going against the trend for the coming year. My soybean ending stocks estimate is much larger than USDA's 310 million bushel estimate, because I expect currency exchange rates to favor Brazilian supplies over U.S. supplies in the year ahead, while USDA expects Brazil to actually build stocks while the U.S. ships aggressively. I'm expecting an aggressive export target for the coming quarter, which USDA is gradually confirming, as Brazilian supplies tighten, but a much slower export pace a year from now if Brazil has a normal crop this next growing season with typical expansion.

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