It was a relatively quiet week in the corn market with December corn futures closing up 2 ½-cents per bushel week-on-week, finishing Friday at $3.83 ¾-cents per bushel. Most of the focus early in the week was centered on a variety of private US corn yield and production forecasts with the USDA set to release the August WASDE report on Wednesday, August 12th.
On Tuesday FCStone estimated the 2015/16 US corn yield at 165.0 bushels per acre and total production of 13,381 million bushels versus the USDA’s July forecasts of 166.8 bpa and 13,530 million bushels. Informa reportedly followed on Wednesday with a yield projection of 165.4 bpa and total production of 13,410 million bushels. The average trade guess overall currently stands at 164.7 bpa and total production of 13,332 million bushels. In general it’s apparent that very few traders are anticipating a corn yield reduction in excess of 4 or 5 bpa in the August report, which stands to reason based on current crop condition ratings. As of August 2nd the US corn crop was rated 70% good-to-excellent, up 1% from where the crop was rated during the 1st week of July.
That said just how useful are the USDA’s crop condition ratings when it comes to actually projecting the US corn yield?
I would argue not very. I’ve always been somewhat of an outspoken critic of the USDA’s good-to-excellent ratings, which I feel have a tendency to be extremely subjective based the USDA’s “statistical methodology,” which relies heavily on the visual observations of approximately 4,000 respondents. There’s nothing about that process in my opinion that exudes confidence or scientific objectivity, which becomes problematic from a trading perspective given the market’s reliance on these ratings to try and then establish an actual corn yield forecast based on what is an abstract collection of data. In fact I think this lack of congruency will come into play even more so in 2015 given the wide variability in growing conditions in the Eastern Corn Belt, and specifically Illinois. As far as Illinois is concerned, I don’t think it’s an overstatement to suggest that depending on where a respondent is within that particular state, he or she is likely to have a very different perspective on IL’s production potential this fall given that just 56% of the state’s corn crop is currently rated good-to-excellent with 29% rated fair.
Just this last week I’ve seen private yield estimates for Illinois ranging from 168 bpa to 180 bpa; these coming from “reputable sources.” Considering Illinois’s the 2nd largest corn growing state in the country and is expected to harvest 11.65 million acres of corn in 2015, a 12 bpa yield difference over the entire state invariably has a significant impact not only on Illinois’s total state corn production but also on total US corn production potential. That yield disparity alone equates to 140 million bushels of production. Furthermore even in my own internal yield modeling I’ve found that if I tweak my state-by-state yield estimates by a relatively small margin of error of 2 to 4% in Iowa, Illinois, Nebraska, Minnesota, and Indiana it has a tremendous impact on US corn production prospects. From a national perspective those same percentage adjustments when applied to the USDA’s July yield estimate of 166.8 bpa equate to 3.3 to 6.7 bpa swing in yield probability and a 270 to 540 million bushel shift in total production. When we consider the USDA’s 2015/16 US corn ending stocks projection was 1,599 million bushels, it becomes apparent that a carryout closer to 1,100 million still isn’t out of the realm of possibilities.
What’s made forecasting state corn yields even harder since 2012?
Again using Illinois as the barometer, in only the last 3 years Illinois has had final state corn yields of 105 bpa (2012), 178 bpa (2013), and 200 bpa (2014). The easy math says that’s a high-to-low yield variance of 95 bpa. It should also be noted that IL’s yield in 2014 smashed the previous record by 20 bpa. Even Illinois’s corn yield in 2013 ranked as the state’s 3rd best yield in history at that time and was rewarded with a good-to-excellent rating of 68%. Now we have analysts estimating Illinois’s corn yield from 170 to 180 bpa and referring to it as a disappointing growing season with below trend-line yield expectations. My point being 2014’s record growing season, in my perspective, completely distorted the market’s ability to define what is versus what isn’t excellent or good or fair, and I do believe this subjectivity is hindering the trade’s ability to confidently evaluate 2015 yield potential. The reality is this year’s final US corn yield could “fall” to 161 bpa by November, the market would call that an average growing season, and yet that would still be the 3rd highest US corn yield ever recorded.
Therefore is there nothing we can glean from the USDA’s weekly crop condition ratings? No, there’s still plenty to apply and trade if it’s used in the right context and combined with the latest technical indicators and direction of money-flow. I remain a proponent of using the current contract low of $3.62 ½ CZ5 (established June 15th and 16th) as the major area of support even on continued corrections in the corn market. The primary reason being that low was made in June after the June WASDE report was released, which reflected a US corn carryout of 1,771 million bushels. Since then we now know that carryout was reduced 172 million bushels in July and is expected to fall again in August (average trade guess currently stands at 1,449 million bushels). Therefore considering crop ratings still suggest a yield decline in next week’s crop report is likely and that December corn futures are currently trading within approximately 20-cents per bushel of the June low, despite August 2015/16 ending stocks expected to be more than 320 million bushels below the June forecast, I’d argue the market structure currently favors finding a way to get long corn. Friday’s Commitment of Traders report also showed the managed money net long decreasing by 79,002 contracts to a more reasonable 163,799 contracts total, which should lessen the risk of a massive liquidation even if next week’s report is deemed bearish or neutral. Overall, I still favor a synthetic long options play versus buying outright futures because ultimately you still have to respect the seasonal, which as I showed last week does support new December corn futures lows into the September-October timeframe.
Thanks for reading and have a great week.
Twitter: @MarcusLudtke
Data References:
- USDA United States Department of Ag
- EIA Energy Information Association
- NASS National Agricultural Statistics Service
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
