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(September 22, 1997) CORN: Now that the September Crop report has passed, we are reviewing our base assumptions for the new-crop year, of which production is an important consideration. Based on hard survey data gathered from our agronomic sources, we are downgrading our yield estimate for the 1997/98 corn crop to 127 bushels per acre from 129 bushels. In turn, our corn production estimate has fallen to 9,400 million bushels from 9,550 million. This reduced supply caused demand to drop marginally, and the net effect on ending stocks was a decline of 124 million bushels to 1,013 million. The resulting stocks-to-use ratio dropped to 10.8% from 12.1%; the USDA's current estimate is 9.2%.
As harvest approaches, the question most frequently asked is: “How low can December corn trade at harvest?” The answer is partly in upcoming yield and production estimates on the USDA's October and November supply/demand reports. However, that does not stop us from attempting to find the answer. Both the 5- and 10-year averages show that yield estimates increase from the September report into the final. This year, that would imply an increase of 1.3-1.6 bushels per acre from the September estimate of 125.2 bushels.
However, since 1980 there have been nine years when the September yield estimate dropped from August, as it did this year, averaging a decline of 3.0 bushels per acre. In five of those years (1980, 1983, 1990, 1993 and 1995), the October yield estimate fell by an average 2.2 bushels per acre versus the September forecast. Extreme weather conditions, unlike those experienced this year, accounted for four of the five declines. Drought hit in 1980 and 1983, while the 500-year flood struck in 1993. In 1995, hot conditions early in the summer were followed by freeze damage in the fall. In the remaining four years when the September yield estimate declined from August, the increase into the October report averaged 0.9 bushels per acre. We conclude that there is not a discernible pattern in the yield change between the September and the October reports.
It is probably safe to assume that the October report will show yield estimates close to the September report. with a downward bias. Early, disappointing yield results in the Corn Belt states has been offset somewhat by encouraging yields in the fringe states. Also, prospects of minor frost damage may hurt yields. At worst, we look for a yield decline of less than a bushel from the current estimate of 125.2 bushels per acre.
Given the potential for the yield estimate to drop in the October report versus September, the question becomes: Can December corn trade lower than the close on the September report date ($2.64¼) during harvest? There have been six years since 1980 that have had a lower yield estimate in October than in September, averaging 2.1 bushels per acre.
In four of the six years, December futures declined from the September report to the harvest low by an average of 15.5 cents per bushel; prices were unchanged in 1986 and rallied 8 cents in 1995. In addition to the odd weather in 1995 that contributed to the early season rally, yield fell 4.5 bushels per acre from the September report to the October reading, for a record month-to-month decline. In 1986, cash market prices were well under $2 and the lowest in more than a decade. Thus, it is not too hard to imagine why prices did not fall much that year.
Considering the data, it appears that the four years when prices declined an average of 15 cents from the September report to the harvest low could be an appropriate representation of what could happen this year. This means December futures could fall to near $2.50 from the September report close of $2.64¼. Prices could be vulnerable to an additional decline of 5-10 cents depending on harvest progress and farmer marketings.
Tom Levis
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