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Wednesday, August 5, 2015  
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Todd's Take
Tuesday, August 4, 2015 7:15AM CDT

By Todd Neeley
DTN Analyst

Normally, if you asked me what the most important USDA report was for soybeans, I would say the June 30 combination of Acreage and Grain Stocks. The two tell us a lot about the potential crop size and give a good read on how demand is going. Quite often, the June 30 reports set the tone for the rest of the growing season as they did in 2014.

This year, however, is different. On June 30, November soybeans closed 57 cents higher after USDA pegged soybean acres at 85.1 million and June 1 soybean stocks at 625 million bushels. Soybean plantings were a new record high, but not as high as many feared. June 1 supplies were less than expected and a strong indication that demand was faring much better than most realized.

While it was gratifying to see DTN's earlier claims of bullish soybean demand validated, it has been disappointing to see that prices have not carried through higher since the June 30 reports. On July 7, prices got hit by a case of Sinophobia as the market noticed that the Shanghai Composite Index was down 28% from its June 12 high. Those fears were re-kindled Friday when USDA announced that China cancelled a previous sale of 7.3 million bushels of old-crop soybeans.

In spite of the 97-cent drop in Nov. soybeans in the month of July, it is not clear if market fears about China apply to soybean demand and there is still a case to be made that the fundamental outlook for soybeans is much less bearish than current prices indicate. Because there remains much we do not know about the size of this year's crop, the August WASDE report is setting up to be the most important USDA report of 2015. Barring another weather surprise, this report should set the tone for the remainder of the season.

Conflicting data is always hard to assess and that is exactly what we have this year with excess rain hurting crops from Missouri to Ohio while the rest of the Midwest looks great. In late June, soybean prices climbed higher as market attention focused on the rain. In late July, prices fell back lower as attention turned back to the states where crops are excellent. The eventual truth may be somewhere in the middle as DTN's Soybean Condition Index declined from 169 on June 8 to 151 as of Monday.

With soybean demand running at a bullish clip and uncertainty high over the size of this year's crop, the August WASDE report and USDA's second planting survey will give us USDA's first credible crop estimate this year with actual field data included. According to last year's WASDE report, USDA's estimates of U.S. soybean production have a 90% confidence interval of +/- 10.9% in August.* Normally, that does not sound very impressive, but this year, it will be a big improvement over the existing confusion.

One of the most surprising things about soybeans in 2015-16 is that, even after a record U.S. harvest in 2014 and record South American harvest in early 2015, there is a chance that U.S. soybean stocks could end the 2015-16 season as low as the mid-200s, far below USDA's May estimate of 500 million bushels.

As an example, consider that USDA still showed 3.4 million acres of unplanted soybeans in their final planting assessment on July 6. If the August 12 report reduced the estimate of harvested acres from 84.4 to 83.4 million and this year's excess rain cut the yield estimate from 46.0 to 45.0 bushels an acre, the ending stocks estimate would drop from the current 425 down to 293 million bushels. Include the possibility of a 50-million bushel increase in old-crop demand that won't be confirmed until Sept. 30 and you have a much less bearish ending stocks estimate of 243 million bushels or roughly 6.5% of annual use.**

Of course, the scenario above is just one in a wide range of possibilities and that is why the Aug. 12 report is potentially so dangerous. In simple terms, a yield of 46.0 bushels or higher keeps soybean supplies plentiful. 45.0 is significantly less bearish and anything below 45.0 would be surprisingly bullish. Recent concerns about China's demand also cloud the outlook, but are outside the scope of USDA's August report.

Back in January, it was hard to imagine a bullish scenario for soybeans this year without drought, yet here we are, early in August and still not sure if ending supplies will be 250 million bushels or 400. USDA's Aug. 12 report won't answer all our questions, but it will dramatically narrow the range of possibilities and could have a powerful impact on prices. This year, we may see fireworks in August.

* USDA's WASDE report for Aug. 2014 found at: http://usda.mannlib.cornell.edu/…

** To keep things simple, USDA's demand estimates were kept unchanged.

Todd Hultman can be reached at todd.hultman@dtn.com


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