FUTURES TRADERS GUIDE TO THE WASDE

FUTURES TRADERS GUIDE TO THE WASDE Your Guide To Understanding The USDA World Agriculture Supply & Demand Estimates For Corn, Soybeans And Wheat By Craig & Drew Daniels 1.800.800.3840

What Is The WASDE? The World Agricultural Supply and Demand Estimates (WASDE) report provides the USDA s comprehensive forecasts of supply and demand for crops (US and global) and livestock (US only). The report gathers information from a number of statistical reports published by USDA and other government agencies, and provides a framework for additional USDA reports. The USDA s home page for the WASDE may be found here: http://www.usda.gov/oce/commodity/wasde/ As you read through this guide, you may want to have a copy of the WASDE report handy. When you click on the above link, you will be able to download the latest version of the WASDE or access one of the archived reports. You may also access the most current WASDE report via this web link: http://www.usda.gov/oce/commodity/wasde/latest.pdf What Markets Does The WASDE Cover? The World Agricultural Supply and Demand Estimates (WASDE) report is prepared monthly and includes forecasts for U.S. and world wheat, rice, and coarse grains (corn, barley, sorghum, and oats), oilseeds (soybeans, rapeseed, palm), and cotton. U.S. coverage is extended to sugar, meat, poultry, eggs, and milk. While the WASDE covers many different crops and livestock, there are three markets that garner significant attention when the reports are released. Corn, Wheat and the Soybean are the three reports that the futures markets greatly anticipate. Out of the total 325 million acres of available US farmland, Corn, Soybeans and Wheat make up about 70% of all harvested acres. What Is The Highlights Report? The Highlights Report is in the first few pages of the WASDE. It is a summary report of the detailed balance sheets that follow the Highlights Report. The report explains the findings and changes the USDA observes. In essence, the Highlight Report provides the color for the Balance Sheets. What Exactly Are The Balance Sheets? The WASDE reports a full balance sheet for each commodity. Separate estimates are made for components of supply (beginning stocks, imports, and production) and demand (domestic use, exports, and ending stocks). Domestic is then subdivided into major categories, like corn for feed and corn for ethanol. 2

The WASDE also reports forecast season-average farm prices for most items. Prices tie together both sides of the balance sheet. Market prices aid in rationing available supplies among competing uses. Prices also indicate potential supply responses, which include potential planting decisions for the upcoming year. The process of forecasting price and balance sheet items is complex and involves the interaction of expert judgment, commodity models, and in-depth research by USDA analysts on key domestic and international issues. Corn Balance Sheet In the bottom half on page 12 of the WASDE report you should find the US Corn Balance Sheet. For your convenience, we have reprinted the Corn Balance sheet from the July 2012 WASDE below. Understanding the WASDE report boils down to understanding the Balance Sheets. If you can master this section, you will be able to have full control over the WASDE report. The objective of the Balance Sheet is to determine Supply and Demand. First take a look at five columns of the table below. The 1st column on the left defines the data sets we will be evaluating. They include Area Planted, Area Harvested, Yield per Acre, and Production on the Supply Side, and data sets like Feed & Residual and Exports on the Demand Side. The other four columns to the right are for different crop years. There are four columns for three years of data. The first crop year we see is from two years ago, the 2010/2011. The next crop year is old crop, which is the 2011/2012 crop year. The last two columns (the 4th and 5th columns) are for new crop corn 2012/2013. The 4th column shows the numbers reported in the prior months WASDE. The 5th and last column shows the numbers reported for this months (current) WASDE. This report comes from the July 2012 WASDE. So the 4th column shows the numbers reports on the June 2012 and the 5th column is for July 2012. Now that we know what years and crops the WASDE covers, we need to get into the how the tables are organized and what data it holds. The top section of the report is all about the Supply Side and the second half is the Demand Side. Supply Side: The most important metric for the Supply Side is Production. Production is the amount of corn we grow in a given year. To find this out take the Area Harvested and multiply it by the Yield per Harvested Acres. Production = Area Harvested X Yield per Harvested Acre If we look at 2010-11 corn below (2nd column), we see the Area Harvested is 81.4 Million Acres and the yield is 152.8. 152.8 X 81.4 Million Acres is how the USDA gets the 12447 Production in the 4th row of the table. 3

Beginning Stocks for the current year are the same number as the Ending Stocks from the year before. For the 2010/2011 year (2 crops ago) this number will not change. However, for new crop, the Beginning Stocks are still not known, it can only be estimated. We are still using old crop corn for sales this year. That means as the Ending Stocks estimates change for old crop, they are also changing for Beginning Stocks for the new crop. Beginning Stocks = Last Year s Ending Stocks The Total Supply for each year is going to be the sum total of the Beginning Stocks (last year s ending stocks), Production (this years Harvested Acres X Yield), and Imports, which is corn that the US imports from other countries. The sum of these three inputs represents the total supply of corn in the US for any given year. Total Supply = Beginning Stocks + Production + Imports Demand Side: Now that we know the Total Supply, we need to also understand the Demand side, which is also known as Total Use. To find the Total Use we need to know the Feed and Residual, Food, Seed & Industrial, and Exports. Domestic Use is the sum of Feed & Residual and Food, Seed and Industrial (FS&I). You DO NOT add back the Ethanol usage. Ethanol is already included in FS&I. Feed & Residual mainly comprises of the corn used for Livestock feed. FS&I represent the corn we use for food, seed for the next crop, and ethanol. Domestic Use = Feed & Residual + Food, Seed and Industrial After we get Domestic Use, we can then move on to Exports. This row is for all corn the US sells overseas. Finally, we now have the numbers needed for Total Use. Total Use = Feed & Residual + Food, Seed & Industrial + Exports The most important number in each column is Ending Stocks. Ending Stocks shows how many millions of bushels of Corn we have at the end of the year and how much we carry over to the next year. Ending Stocks = Total Supply Total Use One very important metric that traders use but is not on the WASDE report is Stock to Use Ratio. This ratio gives us an idea of the how the ending stocks stack up to total demand. To get the Stocks to Use, just divide the Ending Stocks by the Total Use. In 2010/2011 the stock to use was 1128 Ending Stocks divided by 13055 Total Use, which is an 8.64% stock to use percentage. Stocks to Use Ratio = Ending Stocks / Total Use 4

Finally, at the end of the report, the USDA reports their average farm price for Corn. The price of corn will go up and down depending if the WASDE increases/decreases Acres, Yield, Usage and Exports. If the USDA comes out and says Harvested Acres are increasing, the price of corn will go down (more supply). If yields are decreasing, prices go higher (less supply). If the WASDE says we are using less Feed for livestock, prices decrease (demand decreases). If the WASDE says exports are increasing, then prices go higher (demand increases). If you can get a handle on the WASDE report, the market expectations heading into the report, and have an idea of what each piece of data means, you can greatly improve your understanding of how grain markets trade based on fundamental reports. CORN 2010/2011 2011/12 EST. 2012/13 PROJ. Million Acres 2012/13 PROJ. Area Planted 88.2 91.9 95.9 * 96.4 * Area Harvested 81.4 84 89.1 * 88.9 * Bushels Yield per Harvested Acre 152.8 147.2 166.0 * 146.0 * Million Bushels Beginning Stocks 1708 1128 851 903 Production 12447 12358 14790 12970 Imports 28 22 15 30 Supply, Total 14182 13508 15656 13903 Feed and Residual 4793 4550 5450 4800 Food, Seed & Industrial 6428 6455 6425 6320 Ethanol & by-products 5021 5050 5000 4900 Domestic, Total 11220 11005 11875 11120 Exports 1835 1600 1900 1600 Use, Total 13055 12605 13775 12720 Ending Stocks 1128 903 1881 1183 CCC Inventory 0 0 Free Stocks 1128 903 Outstanding Loans 48 100 Avg. Farm Price ($/bu) 5.18 6.10-6.30 4.20-5.00 5.40-6.40 5

Soybeans Balance Sheet The Soybean Balance sheet may be found on Page 15 of the WASDE. The soybean balance sheet is very similar to the corn balance sheet. Once you learn how to read one of the Balance Sheets, the learning the rest becomes much easier. Just like with Corn, the first half of the Balance Sheet is about Supply and the second is about Demand (Use). Supply Side: On the Supply Side, Production is equal to Area Harvested multiplied by Yield per Harvested Acre. Total Supply is Production plus Beginning Stocks plus Imports Production = Area Harvested X Yield per Acre Beginning Stocks = Last Year s Ending Stocks Total Supply = Production + Beginning Stocks + Imports Demand Side: On the Demand Side, we need to find Crushings, Exports, Seed and Residual. Total Use = Crushings + Exports + Seed + Residual Crushings and Exports make up for the majority of Soybean use while Seed and Residual are more of an afterthought. Crushing use is derived from the demand for both soybean oil and soybean meal used in feed and human food products. Soybeans are crushed to separate out the oil from the protein and create crude soybean oil and soybean meal. Exports represent the soybeans that American producers send abroad. Seed represents the soybeans used for seeding future crops. Residual is what the USDA uses to make the numbers fit together. If there are Soybeans used and they can t account for it, the USDA puts them into the Residual classification. The last metrics to calculate are Ending Stocks and the Stocks to Use ratio.»» Ending Stocks = Total Use Total Supply Stocks to Use = Ending Stocks / Total Use 6

SOYBEANS 2010/2011 2011/12 EST. 2012/13 PROJ. Million Acres 2012/13 PROJ. Area Planted 77.4 75 73.9 * 76.1 ** Area Harvested 76.6 73.6 73.0 * 75.3 ** Filler Bushels Yield per Harvested Acre 43.5 41.5 43.9 * 40.5 ** Million Bushels Beginning Stocks 151 215 175 170 Production 3329 3056 3205 3050 Imports 14 15 15 15 Supply, Total 3495 3286 3395 3235 Crushings 1648 1675 1645 1610 Exports 1501 1340 1485 1370 Seed 87 88 89 89 Residual 43 13 36 35 Use, Total 3280 3116 3255 3105 Ending Stocks 215 170 140 130 Avg. Farm Price ($/bu) 11.3 12.4 12.00-14.00 13.00-15.00 Wheat Balance Sheet The Wheat Balance Sheet may be found on page 11 of the WASDE. The wheat balance sheet is almost exactly the same as the corn balance sheet. Now that you know the Corn and Soybeans balance sheets, you should be able to understand the Wheat balance sheet. For your convenience, I will again list the formals below. Take this opportunity to review the Wheat Balance Sheet and do the calculations yourself. Supply Side: Production = Area Harvested X Yield per Acre Beginning Stocks = Last Year s Ending Stocks Total Supply = Production + Beginning Stocks + Imports 7

8 100 South Wacker Drive, Suite 1225 Demand Side: Domestic Use = Food + Seed + Feed & Residual Total Use = Domestic Use + Exports Ending Stocks = Total Use Total Supply Stocks to Use Ratio = Ending Stocks / Total Use WHEAT 2010/2011 2011/12 EST. 2012/13 PROJ. Million Acres 2012/13 PROJ. Area Planted 53.6 54.4 55.9 * 56 Area Harvested 47.6 45.7 49.2 * 48.8 Bushels Yield per Harvested Acre 46.3 43.7 45.4 * 45.6 Million Bushels Beginning Stocks 976 862 728 743 Production 2207 1999 2234 2224 Imports 97 115 120 120 Supply, Total 3279 2977 3082 3087 Food 926 940 945 950 Seed 71 77 73 73 Feed and Residual 132 169 220 200 Domestic, Total 1128 1186 1238 1223 Exports 1289 1048 1150 1200 Use, Total 2417 2234 2388 2423 Ending Stocks 862 743 694 664 CCC Inventory 0 0 Free Stocks 862 743 Outstanding Loans 15 10 Avg. Farm Price ($/bu) 5.7 7.24 5.60-6.80 6.20-7.40

Conclusion Now that you know and understand how to read the WASDE, you can start making your own Balance Sheets to model where the price of Corn, Soybeans and Wheat will be in the coming weeks and months. You will also have a greater understanding of the fundamental numbers when they are reported and how it can effect price changes. If you don t have time to do it yourself, then I highly recommend you register for my free weekly newsletter s Take. Before each WASDE I will send out what the trade estimates are for the WASDE and then we will review the report after the release. Sign Up for My Free s Take Newsletter If you enjoyed the this article, the educational nature, and the way it was presented, then I highly recommend you sign up for a free subscription to my weekly newsletter, s Take: http:///offers/398/178/ About s Take s Take is a weekly market commentary newsletter with intraday trade recommendations published by Craig, Senior Broker with Daniels Trading in Chicago. s Take was created to give traders and investors a window into the elusive world of LaSalle and Wall Street. About Craig Craig is a Senior Broker at Daniels Trading and the author of the s Take futures and options newsletter. Craig began his career in the Financial Industry in 1998 providing trading support at the NYSE and then moved on to Goldman Sachs as a Technical Analyst in 2000, focusing on Commodity and Futures trading systems. Craig joined Daniels Trading in Chicago in 2007 as a Futures & Options Broker. He has his bachelors from the Rensselaer Polytechnic Institute (RPI) and his MBA from Stern School of Business at New York University (NYU), which was part of the Goldman Sachs Executive Program. Craig uses his understanding of Fundamental and Technical Analysis to help traders identify and act on trading opportunities in the Futures & Options markets. Craig has a deep and extensive knowledge of Online Trading Platforms, Pit Execution, Option Strategies, Systems Trading, Newsletter Trading, and Managed Futures. Craig excels in providing exceptional client service, trading execution, and the ability to expertly match client assets with trading and investment opportunities. 9

Sources USDA, World Supply and Demand Estimates, 4/12/2012, http://www.usda.gov/oce/commodity/wasde/ (7/15/2012) USDA, How the WASDE Report is Prepared 6/15/2012, http://www.usda.gov/oce/commodity/wasde/prepared. htm (7/15/2012) USDA, How the WASDE Report is Prepared 6/15/2012, http://www.usda.gov/oce/commodity/wasde/prepared. htm (7/15/2012) Disclosure THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION. THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE RISK DISCLOSURE WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICES. BEING A SUCCESSFUL PAPER TRADER DURING ONE TIME PERIOD DOES NOT MEAN THAT YOU WILL MAKE MONEY WHEN YOU ACTUALLY INVEST DURING A LATER TIME PERIOD. MARKET CONDITIONS CONSTANTLY CHANGE. 10