August 16, 2019 / 9:43 AM / 2 months ago

Column: Market ideas for U.S. corn yield still clash drastically with USDA

FORT COLLINS, Colo. (Reuters) - Virtually no one in the agriculture market was prepared to see such a high U.S. corn yield from the U.S. government on Monday. This, coupled with a larger-than-expected planted area, sent Chicago corn futures on their steepest two-day fall in more than six years.

A combine harvests corn on Blake Erwin's farm near Dixon, Nebraska, U.S., October 26, 2017. REUTERS/Lucas Jackson

But Twitter users think U.S. corn yield is likely to end up much lower than the U.S. Department of Agriculture’s peg of 169.5 bushels per acre. In fact, USDA’s hefty number hardly swayed the crowd from their expectations prior to Monday’s report.

On Wednesday, I posted a poll on Twitter asking for users’ best guess of final U.S. corn yield. Of the 1,807 voters, some 56% see that number at or below 161 bushels per acre. Only 11% of the voters chose 166 bpa or higher.

The purpose of this survey was to gauge how sentiment may have shifted since I had conducted the exact same poll on July 21, especially considering the new USDA forecast. At that time, some 63% of the 1,682 voters believed final yield would land at or below 161 bpa. Again, 11% chose 166 bpa or higher.

If it seems like the corn market has watched this movie before, it has, most recently in 2017. Like this year, crop conditions in 2017 were lower than in other recent years, and analysts were stunned when USDA’s August yield topped their range of guesses. Yield ultimately set a record of 176.6 bpa that year.

That is not at all meant to suggest that yield is headed for a new high in 2019, but it should be concerning that so many market participants are still dead-set on a near-disaster yield scenario. Monday’s market collapse had to do with the fact that the trade expectations were too narrow, and in the case of corn acreage and stocks, completely one-sided.

HISTORICAL CLUES

Looking at how USDA corn yield estimates evolved in the past, a significantly lower final yield is not the typical outcome. Within the past 15 years, final corn yields have been lower than what USDA’s World Board had projected in July only three times (2010, 2011 and 2012).

USDA’s August yield number is more variable in terms of it being lower or higher than the final. But it hardly ever falls as much as most of the Twitter voters want, and history suggests that it would take some pretty extreme weather to pull it off.

A final yield of 161 bpa would be down 5% from the August figure. In the past 25 years, final yield has fallen from August by that amount or more only three times (2010, 1995 and 1993). The latter two years also featured delayed planting, but the summer weather was much less favorable than it has been this year.

A final yield of 161 bpa would be 8.5% below USDA’s original trend yield of 176 bpa. The only other time that has happened since 1995 was during the epic drought year of 2012. July and August of 1995 were the tenth hottest in 124 years of record for the Midwest. The same two-month stretch in 2010, 2011, 2012, and 1988 are also in that top 10.

This year, it has recently been drier than normal in some important areas of the Corn Belt like Iowa, Illinois, and Indiana, and that is certainly cause for concern. However, temperatures have been mild and largely cooperative since planting across most of the Midwest.

Since it is so rare historically, there must be a convincing argument for the yield to fall so significantly. There is no prior evidence to suggest that record late planting alone could drop yield that much. But is the late planting and the recent dryness together enough to slash the crop by such huge proportions?

An asterisk is needed when comparing USDA’s August 2019 yield forecast with prior August numbers since objective yield measurements are no longer part of this month’s mix. But farmer surveys were a big part of the 169.5 bpa peg, and other large surveys had already suggested something around 167 bpa was likely. Objective yield surveys will be a part of USDA’s September forecasting method.

A major concern has been that such late planting will not allow the crop to finish before the first freeze in the fall. But the U.S. Climate Prediction Center on Thursday said that above normal temperatures were probable across the entire country during the September through November period.

If the market expectations for yield are heavily skewed to the downside in September, it could set up for another tough day in the futures market if USDA’s forecast clashes with analysts’ prediction.

As of Thursday, CBOT December corn futures were at similar levels to the same dates in 2018, 2017, 2015 and 2014. This was even after a 10% plunge on Monday and Tuesday, the largest two-day dive in the most-active contract since 2013. Heading into Monday, futures were already 55 cents per bushel off the June 17 high.

Hedge funds likely exited their net long position in corn futures and options just this week, and that also leaves room for more potential downside in prices, if that is the direction the market takes.

 The opinions expressed here are those of the author, a market analyst for Reuters.

Editing by Lisa Shumaker

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