Will US farm officials be conservative, or daring?
That's the big question facing investors preparing for the
next key Wasde crop report on Wednesday in which, out of the hundreds of
estimates the US Department of Agriculture will offer, attention will focus
very largely on one – for the domestic corn yield.
It is of importance not just for global corn growers, exporters
and users - such as livestock feeders and ethanol plants - but producers and
consumers of other crops, such as wheat, which get called on as substitutes, in
determining very largely market prices.
The range of options open to the USDA is large. Investors
are generally reckoned to be trading a yield of about 150 bushels an acre, or
less, well below the record 166 bushels an acre the USDA had pencilled in
before drought and brutal heat struck the Midwest.
That's a gap, in production terms, of more than 1.4bn
bushels (36m tonnes) – a number not far short of the combined 2011-12 exports of
Argentina, Brazil and Ukraine.
'No realistic number'
Where the USDA places its estimate within that range depends
on whether it fulfils its reputation for measured movements in forecasts, or
follows traders lower.
Indeed, analysts are largely divided into two camps, with
Allendale among those expecting a restricted downgrade to, on the broker's
forecast, 160.2 bushels per acre.
|Forecasts for Wasde corn data, current estimate and (year ago)|
US yield: 154.1 bushels per acre, 166.0 bushels per acre, (147.2 bushels per acre)
US carryout stocks, 2012-13: 1.279bn bushels, 1.881bn bushels
US carryout stocks, 2011-12: 844m bushels, 851m bushels
Global carryout stocks, 2012-13: 144.949m tonnes, 155.74m tonnes
Global carryout stocks, 2011-12: 129.073m tonnes, 129.19m tonnes
Source: Dow Jones
That's not because Allendale believes this to be reflective
of the likely harvest result, which it currently sees at 150.1 bushels per acre.
It is because, historically, the USDA "only gets serious on
yield changes in the August and September reports" when crop potential can be
more accurately, physically gauged, rather than extrapolated from weather data,
Rich Nelson, the Allendale research director, said.
"I do not think the USDA will come out with a realistic number."
Revisions in July reports are "rare", Mr Nelson said, and
even when they have been made, "the largest change down in recent years was of
3.8%", in 1993, which would equate this year to a cut to about 160 bushels per
At Rice Dairy, feeds grains analyst Jerry Gidel said: "A cut
of 16 bushels an acre, or 10%, to 150 bushels an acre - that's a hell of a
break in the USDA's world.
"The point is that we don't know yet what the yield loss
will be. And while we will get some first indications in August, we won't really
get a good idea until September."
Many traders seem to be taking a "conservative view" that
the USDA will be cautious in its downgrade, Benson Quinn Commodities said.
"The USDA has not adjusted its corn yield estimate in the July
report in four years and has not adjusted it by more than three bushels per
acre since 1999, with July yield data relying on crop ratings and not visual
Which is all true.
However, the USDA, in the days before it published yield
estimates so early in the season, has made a hefty cut in a July Wasde to
|Forecasts for Wasde soybean data, current estimate and (year ago)|
US yield: 42.3 bushels per acre, 43.9 bushels per acre, (41.5 bushels per acre)
US carryout stocks, 2012-13: 141m bushels, 140m bushels
US carryout stocks, 2011-12: 170m bushels, 175m bushels
Global carryout stocks, 2012-13: 57.053m tonnes, 58.54m tonnes
Global carryout stocks, 2011-12: 52.749m tonnes, 53.36m tonnes
Source: Dow Jones
And that was in 1988 – the great drought year which many
investors are using as an analogue to this one.
That year, the July Wasde slashed by 29%, to 5.2bn bushels,
the estimate for the corn harvest, without going into the maths behind its
assumption, but noting that "a severe drought across much of the main
corn-growing region, but especially in the eastern Corn Belt, is expected to
lead to sharply lower yields".
(Production actually ended up at 4.9bn bushels.)
That precedent has prompted some analysts, such as US
Commodities, to caution that investors "need to be prepared for a sizeable drop"
in the USDA corn yield forecast.
"They will want to give an adequate signal to get the
process of rationing started," Don Roose, the broker's president, told Agrimoney.com,
saying it was "not unlikely" the USDA will drop the yield forecast to 150
bushels per acre.
After all, there is already evidence of crop losses, with a
USDA report overnight noting that in Indiana "some farmers and crop insurance
representatives are discussing the prospect of destroying or cutting corn for forage".
Mr Roose said: "This crop actually is an agronomy
headspinner. It is not just heat and drought, there are insects too, and
farmers not spraying because they say they do not want to throw good money
"We will hear a lot more of this kind of thing."
Indeed, might the USDA raise its estimate for the area of
crops which will not make it to harvest?
Certainly, at Soybean and Corn Advisor, crop scout Michael
Cordonnier cut his estimate for the harvested area to 88.3m acres, some 600,000
acres less than the USDA is currently counting on.
|Estimates for Wasde US corn output data, current figure, and (year ago)|
All wheat: 2.247bn bushels, 2.234bn bushels, (1,999bn bushels)
All winter wheat: 1.672bn bushels, 1.684bn bushels, (1.494bn bushels)
Hard red winter wheat: 1.014bn bushels, 1.024bn bushels, (780m bushels)
Soft red winter wheat: 425m bushels, 428m bushels, (458m bushels)
White winter wheat: 230m bushels, 231m bushels, (256m bushels)
Hard red spring wheat: 492m bushels, N/A, (455m bushels)
Durum: 88m bushels, N/A, (50m bushels)
Source: Dow Jones
"The amount of abandonment is now increasing due to the
drought and the harvested acreage is declining," he said.
"If this weather pattern doesn't change soon, the corn
harvested acreage will continue to decline."
Where the USDA may play it more cautious is on the soybean
yield, given that the crop, unlike corn, has yet to start its most sensitive
development period – the pod-filling which occurs largely next month in the US.
"It always is a survivor, called a miracle crop," Mr Roose
said, estimating the USDA may cut its soybean yield estimate, currently at 43.9
bushels per acre, by perhaps 1 bushel per acre.
Dr Cordonnier said: "Soybeans have an amazing ability to
recuperate from adverse conditions early in the growing season by setting new
flowers and pods later in the summer if conditions improve."
For the USDA to go cautious on revising its corn yield
estimate too would leave traders for another month having to live with forecasts
"There is a good chance the trader will take a look at the
USDA numbers, and then go back to trading the weather, "Allendale's Rich Nelson
Rice Dairy's Mr Gidel said: "It would create difficulties. What are the hedge funds going to trade? The official number or what people in the market are saying?
Alternatively, the USDA slashes its production number, with the implications
that entails for the balance sheet, and estimates for inventories at the close of 2012-13.
Mr Roose said: "At the moment we have an extra 250m bushels
of corn exports down for 2012-13. That isn't going to happen with a 150 yield.
"We are going to have to ration away demand, and to start
looking for rationing now."