In a ballgame eerily similar to last year, USDA threw a curve ball at the corn market Thursday. But unlike last August when the bulls were able to hit that bearish offering and close higher, this year they clearly swung and missed.
Traders had been expecting a national average corn yield in the 166-bushel-per-acre range, based on crop condition ratings, the drought in the Western Corn Belt and presumed lower plant populations in flooded-out areas back east. While a couple of analysts thought USDA might be as high as 169 bpa, almost nobody thought they would be within 1.2 bushels of a year ago at 169.5 bpa in August. With no change to the expected harvested acres, that put expected production at 14.153 billion bushels, down an even billion from the August 2016 report.
Instead of rallying on the bearish news (last year USDA put out a 175 bpa number when the trade was looking for 171) like they did last year, corn prices were down 0-2 in the count.
How did USDA come up with a much higher U.S. average yield than the trade was expecting?
Blame it mostly on different methodology. For August, NASS analysts rely heavily on farmer surveys, with input from ears-per-acre counts in the objective yield plots and satellite sensing data. They have a limited number of grain-weight-per-ear samples from Texas, Florida, Louisiana, et al, but can’t use that for the main production states because the crop isn’t far enough along on starch deposition.
We have to assume that the farmer surveys generally said the crop had strong yield potential if nothing happens to it. The greenness data would clearly show problems in the far Western Corn Belt and the Northern Plains, but it would tend to be greener than normal in the Eastern Corn Belt with its above-average rainfall this year. The crop canopy has closed up many of the bare spots that were seen in earlier maps.
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On the trade side, a lot of the expectations are based on crop condition models, tied to historical yields. The better models trend-adjust the historical yields to make the ratings more comparable across decades, but not all do so. The biggest issue is that USDA regards the condition ratings (poor to excellent) as color commentary and does not use them in their own yield models.
Which approach is correct? USDA has the stronger argument in the long run, with 4,544 objective yield plots and 21,654 monthly farmer surveys. That should be more reliable than correlations between subjective ratings and final yields that can be significantly different than those in August.
That said, there are some weaknesses in the August NASS numbers. The most glaring is the lack of actual grain ear weights. Some of the private surveys, including our own Brugler Virtual Corn Tour, are using actual ear lengths, girth, etc. When USDA does dry them down and convert to 56-pound bushels, they will be more accurate. For now, it is possible that the trade might be more accurate if indeed the crop conditions reflect actual influence on ear development and yield potential (and not just a beauty contest).
A second potential weakness is the harvested acreage base. NASS didn’t make any adjustments to harvested acres Thursday, despite anecdotal reports of abandonment in the Dakotas and prevented planting claims in the ECB. NASS has that data every week, not just when they blend it into the October crop report. Corn prevented planting claims for Illinois to date are almost one-third fewer than in 2016, while Ohio is almost double. That is a tough trend to decipher.
The market reaction Thursday also had a technical component. Both corn and soybean charts were up against plausible short-term resistance from trend lines or moving averages. The corn charts have head-and-shoulders tops in place and have not reached their downside counts. The soybeans had broken below the bottom of descending triangle formations, and again had not reached the counts. They were vulnerable to a sell-off on bearish news, and that is what they got to work with.
None of this says that the final U.S. average yield will be 169.5 bpa. Nor does it suggest that the low price for the year is in place. The market on Thursday simply said that it had enough respect for USDA’s numbers (and recognition of huge global carryover stocks from last year) to put the commodities on sale.
Alan Brugler may be reached at firstname.lastname@example.org