"Persistent and extreme June dryness across the central and eastern Corn Belt and extreme late June and early July heat from the Central Plains to the Ohio River Valley have substantially lowered yield prospects across most of the major growing regions," said USDA in this morning's World Agricultural Supply and Demand Estimates.
The department won't survey the corn and soybean crops until next month, but brutally hot, dry weather across much of the Corn Belt made it clear that yield prospects had plunged.
Corn futures had already built in a smaller corn crop and had soared about $1 in a week before easing back yesterday. Two hours after USDA issued its new estimates this morning, old- and new-crop futures were trading about 15 to 20 cents higher.
"I think this market is somewhat relieved in a certain sense that the USDA did come in with some lower expectations on yield," said Jim Bower, president of Bower Trading, Lafayette, Ind. "This is a good report. It solidifies what the trade had been thinking. It restores confidence to price discovery."
On top of the lower U.S. corn crop prospect, USDA reports lower potential soybean yields and declining wheat crop prospects in Russia, Kazakhstan, and China.
Tightening domestic and global supplies led USDA to raise its projected season-average farm prices for wheat, corn, sorghum, barley, oats, soybeans, and soybean meal.
Corn Crop Suffers
"In the Midwest, especially Illinois and Indiana, I'm actually shocked at how bad some of these yields are going to be," said Bower in comments on a MGEX conference call after USDA issued its supply-demand report. He said producers already expect no crop from some fields in those areas.
The average pre-report trade estimate for USDA's corn yield projection was about 154 bu./acre, said Bower. "But under the surface all of us in the trade thought the number needed to be substantially lower."
On a pre-report discussion the CME Group hosted yesterday afternoon, AgResource Company President Dan Basse said his company estimated yield prospects at 141 to 144 bu./acre, but expected USDA to keep its number near 150 bu.
"But if this is truly a drought year and we start talking about a 20 percent yield decline, that puts the U.S. yield at 130 to 132 bu./acre," said Basse. "That is a catastrophe."
Terry Roggensack, founding principal at The Hightower Report, said in yesterday's CME discussion that in six of the past 41 years, heat or lack of moisture was a key factor driving down corn and soybean yields more than 10% from 10-year average trends. Those historic cuts in yields suggest potential national average corn yield of 114 to 140.6 bu./acre.
"If we get below 140 bu. yield, which is down only 12 percent from the 10-year trend yield, we have a real problem on our hands," said Roggensack.
"I don't see any suspension of (ethanol) mandates on the horizon," said Bower this morning. However, if weather stays hot and dry through July and August, "We may see curtailment of ethanol programs."
Domestic feed demand is already being rationed, he said.
"I would think the market has already factored in quite a bit of demand destruction for livestock," especially for the beef industry, Bower said, adding that the feeding industries are "pretty adept" at hedging.
"But I would think that livestock would take the biggest hit first," he said. "I think a portion of that has already occurred."
Corn Balance Sheet Tightens
Here are some of the key numbers USDA issued in its supply-demand estimates for corn, in addition to the yield projection:
- A crop of 12.97 billion bushels would be down 12% from last month's projection but still higher than crops of about 12.4 billion bushels in each of the past two years.
- The feed and residual use projection of 4.8 billion bushels in 2012-13 is down from 5.45 billion projected last month, but still up from 4.55 billion in 2011-12 and about steady from two years ago.
- Ethanol demand is projected at 4.9 billion bushels, off 100 million to 150 million bushels from the prior projection and last year.
- Exports in 2012-13 are projected steady from 2011-12 at 1.6 billion bushels, compared with 1.8 billion two years ago.
- Ending stocks of 1.18 billion bushels projected for 2012-13 would be up from 903 million bushels estimated for this year and up slightly from 1.13 billion at the end of 2010-11. Bower said the trade had expected ending stocks of about 844 million bushels this year and 1.23 billion next year. He also expected the trade to turn quickly from the USDA numbers to focus on weather.
- Global coarse grain supplies for 2012-13 are down 47.6 million tons from last month’s projections because of the U.S. corn crop prospects.
- The lower U.S. crop leads to reduced global coarse grain trade; USDA reduced projected imports by 2 million tons each for China and the European Union.
See all of the data, coverage and analysis of today's World Agricultural Supply and Demand Estimates and Crop Production reports.