Post WASDE – The USDA shocks again:: Macquarie Research,

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Post WASDE – The USDA shocks
again
Feature article
 We summarise our reaction to today’s USDA WASDE report and highlight the
important changes made. Today’s report was always going to be about corn
yields, and the USDA didn’t fail to excite the market. The report was bullish
for soy and corn, neutral for wheat and bearish for cotton.
Post WASDE Reaction Comments
 Corn: The big shock move by the USDA was to reduced corn yields to 153
bpa vs. last season’s yield of 152.8. The implications for corn are dramatic:
the USDA have revised demand down by 340m bu, in line with our
expectations for the required demand with production at this level. Some of
the reduction in US corn production has been offset by increases in Brazilian
and Ukrainian crops by 2mt and 1mt, respectively. In the short term, corn will
trade significantly higher, but a cap will be placed on the market from cheap
wheat feed flowing out of the FSU and Australia. We also note that macro
pressures will remain a sentiment driving fundamentals in the corn markets.
 Wheat: The report in isolation for the wheat market was bearish but
fundamental overflow from the corn market will help support prices. World
wheat production was increased by near 10mt, largely due to a 7mt increase
in FSU production. World demand was also revised higher, in line with our
expectations of increased wheat feeding. The USDA increased feed demand
by 5mt to 127.9mt; we expect further revisions higher in the coming months to
132.2mt. For the US the USDA revised spring wheat area lower by 0.95m
acres, roughly in line with expectations.
 Soybean: The more unexpected move was most probably the revision lower in
soybean yields to 41.4 bpa. Consensus was for yields at 42.7, and the lowest
trade estimate was 42 bpa. We are sceptical of the soybean yield at this level,
as we believe current US conditions are conducive to healthy soybean growth.
From a global perspective the USDA have again revised Chinese 10/11 imports
aggressively lower to 50.3mt, roughly in line with our expectations of 51mt. The
USDA also revised Brazilian production higher by 1mt to 73.5mt, closer to our
expectation of 74.2mt. The report shows the increasing importance of Brazil to
world soybean production, and the amplified sensitivity the market will have to
the forthcoming Brazilian planting window.
 Cotton: We are surprised by the revision higher in US cotton yields to
822lb/acre, given trade estimates in the high 700’s reflecting the severe
drought in Texas. We are sceptical of this yield number and expect realised
US cotton yields to be lower than this level. Globally, the USDA revised world
demand down by 450k bales, reflecting reductions in Brazil, Uzbekistan and
Africa. However, this was offset by an aggressive 1.5m bale decrease in
consumption owing to continue demand erosion to synthetics. Should prices
weaken further from here, we would expect some demand to return to cotton.