USDA is predicting this year’s corn crop will be a real bin buster, with an average yield of 166 bu./acre, well above trend. But many analysts aren’t buying it, particularly since dry conditions have already started to reduce the condition of this year’s crop.
Looking at USDA’s latest Crop Progress report
, shows corn condition has started to deteriorate. As of June 10, 66% of the nation’s corn was rated in good to excellent condition, which is a decline from the previous week’s 72%.
In addition to concerns over soil moisture, some analysts question USDA’s base trend line yield estimate and thus the department’s original 2012 trend yield estimate of 164-bushels per acre, released earlier this year. In May’s World Agricultural Supply and Demand Estimates (WASDE), USDA increased its projected yield to 166 bu./acre and left that number unchanged in the June 12 WASDE report
An error in the baseline?
Earlier this year, when calculating the trend yield for corn, USDA dropped 2011 from its calculations, notes Bill Tierney, economist with AgResource, Chicago. "USDA said it believed 2011 was an unusual year, but you could pick other years as well and say they were unusual," Tierney says. "Dropping 2011 added three bushels to the trend." Tierney argues that including the 2011 average yield in the calculations produces a better trend yield for corn of 161.1 bushels.
Thus, he says, not only is USDA’s base trend yield of 164 bushels for corn probably high but it bumped up the yield in May’s WASDE report to 166 bushels and left it unchanged in the June 12 report even though growing conditions have been far less than ideal.
"Most analysts agree that early planting boosts yield," says Tierney. "The only question is by how much and from what base." Historically, USDA has reduced yield to reflect June weather conditions in the July WASDE report a couple of times, says Tierney. So that report, released July 11, will be closely watched by the trade.
"We are not using a 166-bushel yield in our forecasts," Tierney notes. "We are now using 161 bushels because of the weather conditions and how we calculated trend." AgResource expects seasonal average corn prices to range between $4.40 and $6.10 with a midpoint of $5.25, higher than USDA’s current projected range of $4.20 to $5/bu. and $4.60 midpoint.
"We are looking for lower production and tighter stocks than USDA," he adds. "But we are both looking for sharply lower prices than the 2011-12 seasonal average of about $6.10."
Still the biggest crop ever?
Adam Stout, risk management consultant with INTL FCStone, Kansas City, was a bit surprised that USDA left is corn yield estimate unchanged in the June WASDE report. "Given the lack of moisture in the Midwest in May, I’m surprised there wasn’t a reduction in the yield estimate. I’m thinking that USDA’s yield estimate is too high," Stout says. "The best corn crop we’ve ever grown produced an average yield of 164.7 bu./acre in 2009, and the average yield has only broken 160 bushels two times." The other time was in 2004, when U.S. producers harvested a corn crop that averaged 160.3 bu./acre.
"This year was one of the driest May’s on record," Stout adds. "Why would I believe this year’s crop will produce the largest yield in history?" In fact, he says, today’s prices are likely already reflecting a lower average yield than 166 bu./acre.
USDA left most numbers unchanged in its recent supply and demand estimates for the 2011-12 crop year. It raised corn use for ethanol by 50 million bushels while dropping exports by the same amount, which left ending stocks unchanged. All of the estimates for new-crop were unchanged.
Chad Hart, economist with Iowa State University, says USDA’s new-crop price estimate could be high. "If the crop is as gigantic as USDA is predicting, seasonal average corn prices could be closer to $4/bu. than $4.60 like USDA is projecting," Hart says. "But there is a lot of uncertainty. The central Iowa crop is showing definite signs of stress." If dry conditions persist and final production falls below 14 billion bushels, Hart thinks the seasonal average corn price could be closer to $4.80 or $5/bu.
Demand for new-crop corn is expected to stay strong. The question in Hart’s mind is whether the crop will be big enough to meet that demand.