The Ted Spread
Ted is the Chief Market Strategist and Vice President in charge of the Zaner Ag Hedge Group and specializes in agricultural hedging employing various strategies using futures, futures spreads, outright options and option combinations. He believes it is paramount to be able to use different strategies to adapt to market conditions. Ted works with large to mid size grain and livestock producers and end users in North, Central and South America.
What is Our 2014 Corn Production Potential?
Apr 03, 2014
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Now that the USDA has given us a Prospective Plantings number to work with we wanted to look at a couple scenarios for 2014 corn production and give our early estimate. The two main factors that make up a production estimate are acres and yield. Acres may change between now and the USDA's Planted acreage report and weather will have a hand in determining this. Yield will certainly be dependent on weather as it is every year, however it is important to note that in the last 10 years the yearly deviation from trend line yield has been less than in years past.
To begin with, acreage numbers change on average by +/- 1.127 million acres from Prospective Plantings to Planted Acreage. This year weather will have a big say in which way this goes. After a brutally cold winter in most of the growing area the concern will now be how quickly we can warm up and dry down enough to get planters rolling in the fields. If there were to be major planting delays again this year as there was last year, producers may loose the window of opportunity to get corn planted and switch acres to soybeans. On the other hand, if planting goes quickly and smoothly corn could steal some acres back from soybeans. Also, many analysts were looking for an over all increase of corn, wheat and soybean acreage this year in the neighborhood of 2-3 million acres while the USDA is only looking for about a 1 million acre increase in the big three. So, some more acreage may be found by the time we see a final Planted Acreage number.
Yield is always dependent on the weather. Corn needs moisture and heat units to produce good yields, that has not changed. However, what has changed in recent history is that, due to genetics, corn crops are much more resilient to stress factors then in years past and yield potentials also continue to rise. In fact these genetics are good enough to have guys planting lots of acres in areas that were not big corn producers 5-10 years ago. The net result of ever improving seed genetics is that corn yields do not vary as wildly as they did prior to 2000. So, it will take a major weather event like in 2012 to knock much off or add much to trend line yields.
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A quick note on harvested acreage and trend line yield. Generally harvested acreage is between 90-92% of planted acreage. In recent years the trend has been higher percentages. So, if the USDA's Prospective Plantings number of 91.5 million acres were to come to light we would think we would see 84 million harvested acres. Trend line yield is set by a formula and is presented at the USDA baseline conference in February. This year they are using 165.6 bushels per acre. At face value this seemed high to us, but after seeing the breakdown of the state by state Prospective Plantings report it makes a little more sense.
As far as yield is concerned this year, we did initially think that it would take a better then average growing season to achieve 165.6 bu/acre. However, as we dig into the USDA's Prospective Plantings report we see that a good amount of the reduction in acreage this year will be coming from areas that are not typically national leaders in average yield. For example, the largest corn acreage reduction from year to year is in North Dakota while the largest increase from year to year is in Iowa. So, to an extent it seems that even with smaller acreage this year corn acres are concentrated in higher yielding states and this might justify a higher national yield given normal weather.
When trying to determine corn production there are two moving parts, both influenced by weather. Lower acreage puts more pressure on a good growing season. Given the USDA's Prospective Plantings number and their trend line yield 2014 corn production would be roughly 13.9 billion bushels depending on harvested acreage. If adverse planting weather would cause corn acreage to fall to 90 million acres (1.5 million acre reduction) and weather was normal for the growing season production could fall to 13.681 billion bushels. If planting were to go smoothly and corn were to add 2 million acres, and summer weather was normal production could jump to 14.213 billion bushels. Or, if planting were to go as expected but drought conditions were to return this growing season and shave 8% off of trend line yield production could fall to 12.797 billion bushels. And so on...
On to our 2014 corn production estimate. We feel we will have a slow start but otherwise normal planting season. We do not think there will be a major shift in acreage back to corn from soybeans or wheat however we do feel that overall acreage could increase with corn benefitting the most. So, we are using 92.3 million for our working planted acreage estimate (increase of .8 million over the USDA) and 84.7 million acres for our working harvested acreage estimate. We also think that with long term forecasts hinting toward the possibility of a summer El Nino event we feel that yields could be near or even slightly above the USDA's trend line yield of 165.6. However for now we are going to lean more on the conservative end at a 164.5 bu/acre national yield. Using this acreage and yield combo we would come up with 13.933 billion bushel production. This would compare with 13.925 billion bushels produced in 2013.
So, with fewer acres this year it puts significant pressure on yield. Good weather will be needed for planting and throughout the growing season to produce a crop near 2013 proportions. However, in part due to where corn acreage has declined it is certainly possible to produce a bigger crop in 2014 then 2013 if weather is normal or better. We expect markets to be very sensitive to weather this year and that weather market could be starting early if planting delays start to build.
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May Corn Daily chart:
May Soybeans Daily chart:
May Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or email@example.com
Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie
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