PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 13:09 GMT, Tuesday, 12th Aug 2014, by Mike Verdin
How should investors negotiate Wasde corn yield conundrum?

The US corn yield this year will set a record. But by how much?

There have been plenty of estimates from private commentators, some with figures of 175 bushels or beyond, well above the current record of 164.7 bushels per acre set in 2009.

But the most definite estimate, from the US Department of Agriculture, will be revised later today, in a monthly Wasde crop report that has been eagerly anticipated for weeks, as the US crop has gone through its early growing period and, signally, through July's sensitive pollination stage without, apparently, much trouble.

"Everybody is pretty 'beared up' ahead of this report, looking for big numbers," Jerry Gidel, chief feed grains analyst at Chicago broker Rice Dairy, told Agrimoney.com.

What's baked in?

And after all, expectations of a big harvest have already prompted a large drop in corn futures, down some 28% since the end of April for the best-traded December lot, which has set a series of contract lows.

Forecasts for corn in Wasde report, (existing figure)

US ending stocks 2013-14: 1.240bn bushels, (1.246bn bushels)

Range of estimates: 1.196bn-1.356bn bushels

US ending stocks 2014-15: 2.005bn bushels, (1.801bn bushels)

Range of estimates: 1.777bn-2.203bn bushels

World ending stocks 2013-14: 172.85m tonnes, (173.42m tonnes)

World ending stocks 2014-15: 192.53m tonnes, (188.05m tonnes)

Sources: USDA, ThomsonReuters

But just how big a yield figure have investors factored in to prices? Is it the figure of 170.1 bushels per acre that traders believe the USDA will raise its estimate to, from the current 165.3 bushels per acre?

Or is it the even higher figures that some brokers are expecting albeit with the proviso that the USDA, which typically takes a cautious approach, will get there in stages, spread over the September and October Wasde reports?

And if the USDA estimate this times falls short of expectations, will that be taken as a bullish signal, or merely as measured progress towards a figure above 170 bushels per acre?

In fact, there is a good chance that today's yield figure will fall short of expectations, according to Roach Ag, which says that in years like 2014. with a cool July, yields are underestimated in August Wasdes by an average of 8.8 bushels per acre, compared with the final number.

"It is normally not the August report we see larger yields.  In years like this, it has actually been the October Wasde report," Brian Roach, Roach Ag president, said.

'Large price moves'

All of this matters because August Wasde briefings have a habit of sending prices flying.

"History shows that big swings in USDA August corn and soy production estimates versus trade expectations prompts large price moves," Richard Feltes at broker RJ O'Brien said.

At Iowa-based US Commodities, Don Roose said: "This report is a market mover. It is one of the major reports."

Still, there remains significant scepticism that prices could move upwards, for any lasting length of time, without a major surprise, given the large margin for error before the US harvest looks like being anything but huge.

"Big crops get bigger, so the market says, and that is likely to continue surrounding the market," Mr Roose said.

One-sided outlook

Macquarie, which is relatively downbeat on US corn production prospects, in foreseeing a yield of 169.8 bushels per acre, highlighted the potential for the USDA to raise "only nominally" its forecast for US corn production.

Forecasts for soybeans in Wasde report, (existing figure)

US ending stocks 2013-14: 136m bushels, (140m bushels)

Range of estimates: 125m-142m bushels

US ending stocks 2014-15: 414m bushels, (415m bushels)

Range of estimates: 309m-492m bushels

World ending stocks 2013-14: 67.32m tonnes, (67.24m tonnes)

World ending stocks 2014-15: 85.90m tonnes, (85.31m tonnes)

Sources: USDA, ThomsonReuters

"This may not fundamentally change the outlook for prices, but given the extreme bearish sentiment that exists a conservative change could drive a level of short-covering by speculators," Macquarie analyst Chris Gadd said.

Allendale - which foresees the US corn yield ending up at 174.1 bushels per acre, but forecasts a 171.4 bushels-per-acre number in the Wasde expressed much the same, but in more downbeat language.

"If the report does turn out bullish, it is likely only to prove bullish for two or three weeks," Allendale's chief strategist, Rich Nelson, told Agrimoney.com.

"Whatever number we get, we are heading to new price lows by harvest," when futures prices often bottom out, weighed by the spike in supplies and the removal of the last risk premium.

"The question is how we get there."

Appearance isn't everything

Where is perhaps more scope for a real surprise is in soybeans.

Sure, the condition of the US crop is strong by historical terms, if in a small decline, USDA ratings overnight showed.

"It is an unbelievably good-looking crop we have out there," Mr Gidel said, after a Corn Belt crop tour last week.

But, with August still a critical month for the crop, and soybean prospects not as easy to tell from appearance alone, there is a chance that the USDA will not implement the upgrade to its yield estimate of 0.4 bushels per acre, to 45.6 bushels per acre, that investors expect.

In fact, there is a chance that the forecast will actually be downgraded.

'How big is big?'

"We have had times in big crop years for corn when the soybean number has been revised lower," said Don Roose at US Commodities, which forecasts the yield figure actually being left unchanged at 45.2 bushels per acre.

Forecasts for wheat harvest in Wasde, (existing figure)

Hard red winter: 707m bushels, (703m bushels). 2013: 744m bushels

Soft red winter: 461m bushels, (458m bushels). 2013: 565m bushels

All winter wheat: 1.372bn bushels, (1.367bn bushels). 2013: 1.534bn bushels

Other spring wheat: 579m bushels, (565m bushels). 2013: 534m bushels

All wheat: 2.010bn bushels, (1.992bn bushels. (2.130bn bushels)

Sources: USDA, ThomsonReuters

"The real question is how big is big? There is the risk the report may not come up with the monster figures that people are expecting."

Mr Gidel said: "The USDA is already at a record high, and August is still a major month for determining crop production."

History lessons

In fact, "in only two of the past 15 years was the August crop estimate above the July [USDA] estimate," Anne Frick at New York-based Jefferies said.

"And in only two of 15 years, the same two years, was the August crop estimate above the average pre-report estimate."

At RJ O'Brien Richard Feltes said: "Don't be surprised if [the USDA] trims August soybean yield from 45.2 bushels per acre posted in July.

"USDA August soybean production has fallen short of trade expectations in each of last nine years."

'US has lost competitiveness'

On other factors in the corn and soybean balance sheets, there is less dispute, with some pick-up in Chinese purchases of US soybeans giving faith in hopes for bigger exports of the oilseed in 2014-15.

Forecasts for wheat stocks in Wasde report, (existing figure)

US ending stocks 2014-15: 663m bushels, (660m bushels)

Range of estimates: 557m-744m bushels

World ending stocks 2013-14: 184.25m tonnes, (184.29m tonnes)

World ending stocks 2014-15: 190.41m tonnes, (189.54m tonnes)

Sources: USDA, ThomsonReuters

"There were doubts about US soybean export orders. But after the strong pace of the last four weeks, we are now ahead year over year," Mr Gidel said.

For US corn, however, pace of foreign demand has been disappointing, giving potential for the USDA "to maybe take exports down 100m-200m bushels for 2014-15", Mr Roose said.

The US has lost competitiveness on export markets, largely thanks to higher freight costs, at a time of "a weaker global demand picture for corn", Macquarie's Chris Gadd said.

With the quality of the European Union wheat crop damaged by harvest-time rains, more will be downgraded to feed, "limiting the EU's total corn import programme".

Wheat prospects

But funnily enough, where investors appeared in best agreement on prospects for a bearish Wasde is in wheat, despite the setbacks to the European crop and with the pressure stemming, ironically, mainly from Russia.

While Russia's political tensions with Ukraine and the West have been a big support to wheat prices of late, the country's large harvest is a negative factor for values.

"Russian wheat production should increase 5m-6m tonnes from the USDA's 53m-tonne July forecast," Mr Feltes said, adding that this could allow an upgrade of 4m-5m tonnes to the estimate for the country's exports, to 24m-25m tonnes.

"Harvest yields throughout the [former Soviet Union] have exceeded expectations, in particular in Russia where the crop could reach 60m tonnes," Macquarie's Chris Gadd said.

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