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.
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.
|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 bushelsGlobal carryout stocks, 2012-13: 144.949m tonnes, 155.74m tonnesGlobal carryout stocks, 2011-12: 129.073m tonnes, 129.19m tonnesSource: 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 acre.
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 field surveys."
Which is all true.
|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 bushelsGlobal carryout stocks, 2012-13: 57.053m tonnes, 58.54m tonnesGlobal carryout stocks, 2011-12: 52.749m tonnes, 53.36m tonnesSource: 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 after bad.
"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?
|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 deemed unrealistic.
"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 said.
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."