The Debts of the Spenders: Skeptics Question USDA Soybean Forecast

Questions focus on the validity of USDA estimates regarding the projected supply, frost concerns, and Chinese demand. The overall sentiment had been net bearish per the latest Commitment of Traders report but prices had been pushed slightly higher on outside pressure from dollar weakness. (The DXY dollar index saw a 1 year high in short interest per the COT index as well - please keep in mind that high short interest in any one sector makes the overweighted traders vulnerable to a fade).

USDA Soy Yield, Demand Estimates Raise Analyst Skepticism

The U.S. Department of Agriculture on Wednesday projected U.S. 2009 soybean yield and production at levels below market expectations, and the demand projections sparked skepticism among analysts on the validity of the government estimates.

U.S. soybean production is estimated at record levels, but analysts see the potential for that projection to climb in future USDA crop reports in the absence of a weather threat. “Favorable weather for developing soy crops in their critical month of August so far, and above-average condition ratings set the stage for production estimates to head north from here,” said Bill Nelson, analyst with Doane Advisory Service.

The USDA projected 2009 U.S. soybean production at 3.199 billion bushels with a yield of 41.7 bushels per acre. The production figure was below the average Dow Jones survey estimate of 3.213 billion, with yields below the average estimate of 42.1 bushels/acre. August is when
soybeans enter their pollination stage and that is when crop yields are set.

Compared to last year, soybean production is forecast 8% higher. Based on Aug. 1 conditions, yields are up 2.1 bushels per acre from 2008. If realized, this will tie for the fourth highest yield on record, according to USDA. With the exception of Illinois, yields are forecast higher or unchanged from last year across the corn belt and Great Plains.

“If the first fall frost holds off in the eastern Midwest, and western belt states Iowa, Minnesota, and Nebraska can dodge any late problems, we will see production outlooks go up,” Nelson said.
The decline in the USDA’s yield estimates were textbook changes, as historically USDA drops its yield forecast from July to August by 1/2 bushel an acre, Nelson added. In July USDA used a trend line yield of 42.6 bushels an acre for the 2009 soybean crop.

“It was a little surprising to see USDAlower the soybean yield, when they raised yields for
most other crops,” said Gavin Maguire, research director at e-hedger in Chicago.
However, weather will play a significant part in determining finial yield and production.

Soybeans in the eastern Midwest in particular are vulnerable to crop losses from a normal fall frost due to lagging maturity brought about by late planting. USDA reported Monday that 55% of the crop was setting pods, down from the five-year average of 72%. In Illinois, 42%
of the crop is setting pods, below the average of 77%.

As a whole, U.S. soybean crops are 17 percentage points behind their averages, leaving too many states vulnerable to a normal frost, said Joe Victor, analyst with Allendale Inc. The average frost date for 60% of U.S. soy crops from Ohio to Nebraska is Oct. 5, Victor said.

Meanwhile, demand estimates raised some eyebrows as well, with traders questioning how USDA lowered Chinese imports when China has given indications of raising its import potential.
Tuesday, China’s deputy chief of the economic and trade department under the National Development and Reform Commission, Liu Xiaonan, said China’s domestic soybean output growth can’t match the rate of rising demand, so imports will continue to rise. China will also
encourage processing plants to increase their soybean reserves as well, he said. The China number provides a discrepancy as the country continues to advance in poultry and dairy with crusher demand for soybeans seen outpacing domestic supplies, Victor said.

The U.S. is on target for record firstquarter demand, and USDA has underestimated soy demand in August compared to the final figure in six of the last eight years, said Rich Feltes, director of research at MF Global at a press briefing sponsored by the CME Group. However, some analysts see the potential from smaller demand. Demand is centered on China, but it
needs more diversity as struggles in the livestock industry could limit feed demand for soymeal, Maguire said. More exports can be expected from Brazil and Argentina on higher output, taking
some demand from U.S.

Source CME News for Tomorrow