“Scorched Earth” The Black Swan Didn’t Drown in June

USDA Caliper
“The opera ain’t over till the fat lady sings.” She is still backstage”.  That is the way that my former editor and DTN contributing analyst Alan Brugler ended his column this past week describing the surprise from the August 12th USDA report.  In his column Allen talked about how there was such a large disconnect between the average trade guess of grain stocks and production in the August numbers released by the USDA.  I concur with that.  However, it seems like I can hear the fat lady singing like never before.

USDA reports are very important because they serve as flashpoints for grain market action.  I do not want to discount my good friend and DTN senior analyst Darin Newsom for his views on USDA reports.  I think Darin makes good sense when he talks about his disdain for USDA reports.  However, in my perch in Ontario Canada, farmers are looking for market flashpoints to match up with our Canadian dollar fluctuations.  The monthly USDA reports often serve as a focal point for market action.  We all knew the August 12 report was going to be important.  However, it seemed like the market was leaning the wrong way in spades.  Like Alan Brugler said, it was one of the biggest disconnects between trade guesses and USDA actual numbers ever.

I was at a research day at the Maizex Seeds farm near Tilbury, Ontario when I checked out the unbelievable numbers from USDA.  I was surprised, but I like to say I’ve seen it before.  Needless to say such a bearish report was a little shocking and soybeans quickly got to limit down before finishing $.60 less on the day.  I tweeted a lot of these facts out, but it was a young farmer walking beside me through the plots that caught me off guard.  He asked me what did that report say today.  For whatever reason, I said, “scorched-earth”.  The look in his face was ashen.

For the record the big news was that the USDA actually came in with higher yields for both corn and soybeans at 168.8 bushels per acre and 46.9 bushels per acre for soybeans.  With the monsoon 2015 having deluged Indiana, Illinois and many other parts of the Eastern corn belt in June, the thought of higher soybean yields had never really crossed many analysts’ minds.  There was some thought that the corn yield in the Western corn belt might balance out the problems in the Eastern corn belt, but regardless at the end of the day there are huge crops in the United States later than even our earliest estimations had been back in March.

To say there was gnashing of teeth and mounds of skepticism is an understatement.  However, I would caution all of us with regard to doubting USDA reports.  Yes, I am a student of DTN Senior Analyst Darin Newsom and I understand the measured and healthy skepticism about some USDA numbers.  For instance, 100 million bushels of soybean ending stocks was something we never thought the USDA would go under.  In fact, they never did go went to unusual means to make sure that number was ever breached.  However, last year it did get breached with US ending stocks ending up at 92 million bushels.  However, in my lifetime that is the first time.  USDA numbers will remain the numbers we trade.

On my own farm this year I’m expecting a higher corn yield in 2014 but less soybeans.  So when I look at the USDA numbers the day after the shocking debacle, it’s a bit like a cold slap in the face.  If I am expecting more corn yield on my farm, this benign weather that I have had has been extended into major parts of the US corn belt and I really shouldn’t doubt that USDA corn number.  It’s like the USDA telling me that it’s real, despite all the hype to the contrary over the last six weeks.  The soybean number on the other hand seems high to me, but soybeans are the great liars, you never know what you’re going to get.

Part of this has to do with all the technology that we use.  For instance, on my farm I employ RTK guidance systems on relatively new machinery with new fertilizer technology and of course I just got done spraying all that fungicide to push out even more yield.  So despite the heaviest rains ever in Eastern corn belt in the 30-day period of June, in all totality these good crop yields in the United States are a function of modern management and modern genetics.  It continues to improve and to some extent we are beating back mother nature.

At the same time we have a high US dollar, a much lower loonie and the Chinese economy that is looking shakier than normal.  Yes, I do hear the fat lady singing.  In fact, on the afternoon of August 12th her voice was overwhelming.  Needless to say, harvest time is still out in the future.  In fact, maybe I’m wrong and as Allen says, she is still backstage.  Scorched earth moments are rare in the markets.  I guess that Black Swan didn’t drown in June.