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(August 18, 1997) CORN: Last Tuesday's bullish corn production figure, due mainly to a lower-than-expected yield projection, sent corn prices 20 cents per bushel higher to reach levels not seen since early May. The USDA report projected 1997/98 corn yields at 125.3 bushels per acre, down 5.7 bushels from the July estimate and down 1.8 bushels from last year's final yield. As a result, the production estimate fell 424 million bushels to 9,276 million bushels; July's projection was 9,700 million. The production figure was barely within the low end of the trade range levels that few considered realistic. That made the current forecast all the more bullish. Corn prices quickly traded to limit bid on Tuesday and peaked Wednesday with December corn reaching $2.76½.
However, prices later came under pressure as the market had more time to digest Tuesday's report, concluding that the USDA had underestimated the U.S. average corn yield. The rationale for this conclusion included three ideas: (1) the USDA used a non-traditional surveying method; (2) the report was already out of date by not reflecting beneficial rains since August 1; and (3) the crop is behind normal so it is very difficult to attain an accurate yield estimate. However, we do not agree with these ideas. Here's why:
1. Unusual Survey Methodology. After discussing the methodology used for the latest report with USDA staff members, it is clear that the survey methods did not vary from previous objective yield surveys. As always, the USDA contacted producers in corn-producing states and asked a series of questions regarding the crops' current status as well as future prospects. Then, field surveys were done in what are traditionally the seven largest corn- producing states: Illinois, Indiana, Iowa, Minnesota, Nebraska, Ohio and Wisconsin. (These seven states, which typically represent 70% of annual corn production, are projected to produce 6,667 million bushels out of the 9,276 million projected, or 72%.) Finally, results from the objective yields survey were used as a base to derive the total U.S. figure; a telephone survey was conducted to corroborate the objectively obtained yields and to estimate production in the other corn-producing states.
2. Out- of-Date Report. There was a lot of discussion that the “as of” date was out of date. The August Production report reflects crop conditions as of August 1 rather than the report date of August 12. However, many market participants jumped to the conclusion that the report was “out of date” because the weather had improved since August 1, dumping beneficial rains across dry areas of the central Corn Belt. What they failed to consider is that the weekly Crop Conditions Survey released on August 11 showed that the corn crop's rating (as of August 10) had declined to 98.4% of normal from 102.2% the previous week to its lowest level this season. Indeed, multiplying the crop conditions index rating of 98.4% by the trend yield of 127.5-128.5 bushels per acre results in a yield range of 125.5-126.4 bushels per acre–very close to the August Crop report's yield estimate of 125.3 bushels. In essence, the market had the August yield estimate the day before the crop report and didn't know it!
3. Behind- Normal Crop. The idea that the 1997 corn crop is behind normal persists, and causes some to believe that August 1 was too early to obtain a meaningful, objective field survey. Yet, the weekly Crop Conditions report showed that as of August 10, 28% of the corn crop was in the dough stage, a percentage just slightly below the five- year average of 29.2%. Although the corn crop is at an immature stage, it is hardly behind normal.
1997/98 YIELD POTENTIAL–We continue to believe our yield estimate of 129 bushels per acre is in the ballpark, despite the USDA's shocking estimate of 125.3 bushels per acre in last Tuesday's report. We concede that rainfall projected for the Corn Belt through the current period may not be enough to increase soil moisture levels. However, the hybrids that are being used today are far better than they were just six to 10 years ago, and can withstand stress much better than previous varieties to produce respectable yields.
The August yield estimate can vary greatly from the final estimate in January. However, we do not expect that this year should have any greater variability than the previous five-year average. Indeed, history shows that the yield changes from August to January have been their largest (in both bushels and percent) over the last five years compared to any other five-year period since at least 1960. The latest five-year average change in yield from the August report to the final report was 12.22 bushels per acre; the average percentage change was 10.29%. During that five-year span, two of the years fell an average of 13.7 bushels per acre while three years showed an average increase of 11.2 bushels.
Although we are not forecasting the 1997 average corn yield will change by these magnitudes, applying the historical averages to the August yield of 125.3 bushels per acre would suggest the final yield could fall within a range of 111.6-136.5 bushels. We believe that both the high and low of that range are too extreme. Ultimately, the actual yield will be determined by weather conditions as the corn crop continues to mature, timing of the first killing frost and weather conditions during harvest.
Interestingly, the yield change between the October report and the November report showed the largest average change over the last five years at 4.7 bushels per acre. At first glance, it would seem that the largest change would be between August and September reports because the crop continues to mature in that time. Apparently, either harvest weather is more important than the late maturation stages, or the old adage is true that you find out more about yields once the combines hit the fields.
Tom Levis
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