It's still too early to say for sure, but it looks like dry weather has had a significant impact on U.S. corn and soybean production. In its August 12 crop production report, USDA projected lower average yields than last month for both crops. Many in the business think the estimates still have room to decline.
An example of the latter: USDA plugged in a 139-bushel yield for U.S. corn yield, the fourth highest August corn yield ever. “With crop conditions as of early August estimated the second worst in 12 years, this suggests to me that we are not going to reach those yields,” said Richard Feltes, Refco, Inc.
“Many expect that this corn crop will shrink from today's numbers. This is apparent when looking at previous stress years. USDA is also using an ‘average’ ear weight, and corn conditions have declined from the first of the month.”
Feltes stressed that “even with another 5 bushel per acre decline, we're still looking at a 1.5 billion bushel corn carryover, which is suggestive of December corn in the $2.10 to $2.15 area. But at that level, there should be a lot of interest in buying corn because of the shrinkage going on in global corn stocks and the ongoing drawdown in China.”
Feltes also stressed that USDA's Aug. 12 report has the greatest accuracy in predicting the wheat crop, followed by corn. It has “very limited value” in estimating soybean production.
Feltes added that in five of the last six years, both corn and soybean USDA-projected yields have declined from August to September, and the bean yield has a much greater chance of declining than the corn yield. “But remember, we're not going to have a real accurate number for crop size until the October report.”
USDA also lowered soybean ending stocks to 180 million bushels. Noted Feltes, “Anything below 190 million bushels is supportive because USDA has underestimated new crop soybean demand in three out of the last four years.”
While USDA maintained this year's Brazilian soybean crop estimates, “it is important to remember that USDA has often underestimated production. A long term review of Brazilian soybean yields reveal that years of low yield are the exception rather than the rule.”
According to Feltes, “the soybean supply and demand situation is still rather dangerous. Yield could still drop, demand could still go up and we still have an uncertain South American situation ahead of us.”
“The fireworks for the year are not over for corn and beans,” added Don Roose, an analyst with U.S. Commodities, Inc. “From a bull perspective, world ending stocks numbers continue to shrink and U.S. ending stocks continue to shrink. How we go short term is debatable, but more than likely, we are going to put our lows in higher than what the trade had thought.”
Roose believes that corn acreage, unchanged from last month by USDA, and soybean acreage, down 200,000 acres, “could decline further. With all but one county in Illinois declared a disaster area, the 125-bushel corn yield estimate and 39 bushels on soybeans for the state look high. We spent a great deal of the growing season in some of the hottest conditions since 1995.”
Feltes added that if oil prices, which recently pushed over $66 a barrel, are sustained, “this certainly is going to have enormous implications for planted area mix in the United States next year. The higher production cost crops like corn are going to be losing to both wheat and soybeans.”