Producers and analysts alike will be watching USDA’s crop reports Sept. 12 to see whether any surprises send the corn futures limit up or down for the first time since the CME Group expanded daily limits on corn. On Aug. 22, the daily limits for corn futures and options on the Chicago Board of Trade rose from 30 cents to 40 cents per bushel.
Prior to the change, some speculators, analysts and hedgers were concerned that expanded corn limits would result in increased volatility and margin account requirements. David Lehman, managing director of commodity research and product development for the CME Group, however, argued that increasing the daily trading limit would actually reduce the number of limit moves in corn, thus decreasing volatility.
So what did happen in the first two weeks of trading following the implementation of 40-cent limits on corn? Volatility appears to have decreased. In fact, the December 2011 U.S. corn futures contract has neither increased nor decreased by even the old 30-cent limit on a daily close basis. The closest it came was on Sept. 1, when it settled at $7.4475, down 22 cents from its opening price. All of the other daily settlement changes have been smaller, both on the downside and the upside, since the limit expansion went into effect.
Next Monday and Tuesday will be critical in terms of volatility and whether the expanded limits come into play. Estimates on corn yields are coming in lower than USDA’s August estimate of 153 bu./acre.
Allendale released its updated yield estimate on Sept. 6 of 147.7 bu./acre, down 5 bu. from the firm’s August estimate of 152.7 bu./acre. If realized, it would be the lowest corn yield since 2003’s final yield of 142.2 bu./acre.
"Almost every state in our survey reported lower yields," says Rich Nelson, director of research for Allendale. States reporting the biggest problems were Missouri, Illinois and Indiana. "We expected better corn yields in parts of Nebraska and Minnesota, but we didn’t see that." This year’s pollination period was one of the worst in terms of heat and lack of rainfall, he says, and dryness continued right into August.
FCStone’s Sept. 1 estimate for the U.S. corn yield is even lower than Allendale’s at 146.3 bu./acre, down nearly 6 bu. from the firm’s August estimate of 153.2 bu./acre. The firm’s corn production number was also subsequently cut to 12.35 billion bushels, which is 564 million bushels below USDA’s latest production estimate.
Informa’s latest average U.S. corn yield estimate of 159 bu./acre, released Sept. 6, was higher than both Allendale’s and FCStone’s estimates, but still dramatically lower than its August estimate of 158 bu./acre.
Nelson says he would not be surprised to see large prices swings for a day or two after USDA releases its Crop Production report and World Agricultural Supply and Demand Estimates (WASDE) report on Monday, Sept. 12. But he also thinks USDA’s corn yield will come in someplace between 145 and 148 bu./acre. "I don’t think we’ll see the 40-cent limit hit," he adds.
Adam Stout, risk management consultant for FCStone, thinks Monday’s corn trading session could see big prices swings. "Forty cents is a pretty big move, though, and we’d need to see a major revision in USDA’s numbers for prices to move limit up or down," he says. Currently, the market is trading an average corn yield of less than 150 bu./acre. "To get a limit move next week, USDA would have to come out with an average yield of less than 146 bu. or more than 152 bu.," Stout adds.
Regardless of what happens next week, volatility will remain a concern for producers hedging their crops. Under the expanded limit of 40 cents, a limit-up day would require hedgers to put $2,000 into their margin account for every regular futures contract sold.
For More Information
AgWeb.com will have full coverage of the Sept. 12 reports, following the 7:30 a.m. report release.