Which Way for Yields and Production Now?

September 18, 2010 08:00 PM


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Fundamental analysis is complex with its many pieces and lack of measurement of some key components such as feed use. This year, it is accepted that demand for U.S. corn, soybeans and wheat is strong. Marketing advisers are most focused on this year’s harvest and next year’s acreage. We’ve asked a few for their expectations. (Their answers appear alphabetically based on company name.)


Allendale Inc. "We believe USDA’s yield is solid," says Bill Biedermann of Allendale, whose client survey resulted in a 162.3-bu. yield, very close to USDA’s September figure of 162.5. "Crop conditions did not reflect much more of a decline than the yield reported in September," he says. "In addition, 70% of the time in the past 20 years, USDA increased the yield in later reports."


In response to market chatter that yield could fall substantially, Biedermann points out: "Last year's off-the-combine yield was not 164.7. It was much, much higher. USDA's 164.7 number came after being adjusted for moisture and test weight. Test weights can vary 10% from normal in good and bad years. If you factor in a 5% adjustment, then last year's off-the-combine yield was 173.4. If you use a 10% adjustment then the advertised yield would be 183. 

 "So yes, we are hearing of harvest yields being 10 to 15 bushels lower," he says. "But are you hearing of 52# test weights this year? No. Are you hearing of ridiculous moisture levels this year? No. That is why USDA will NOT bring yields 10 bushels lower from here."

Based on Allendale’s 162.3 bu. national corn yield, they see ending stocks of 1.09 billion and a futures price range of $4.10 to $4.80. "Stocks at 1.1 billion bushels is tight but it is not a shortage unless there is a huge jump in demand or a production problem next year. We would turn to the sell side of the market in the $4.80 area if rejection is seen and over time we will look to be a buyer on a harvest sell off."


Should yields decline to 160 bu., carryover would fall to 929 million and the futures price range would be $4.40 to $5.20, Biedermann says. A yield of 158 bu. should send carryover to a short 792 and prices to $4.80 to $5.60.


Brock Associates. Richard Brock of the Brock Report offers three corn and soybean yield scenarios: If corn yields were to fall to 159 bu./acre, carryover slips to 885 million bushels and the farm price would run $4.50 to $5.50; at USDA’s 162.5 bu. and ending stocks of 1.21 billion, farm price is $4 to $4.75. Should yield rise to 164 bu., ending stocks rise to 1.38 and prices drop to $3.75 to $4.25.


Soybeans yielding only 44 bu. would mean stocks under 300 million and prices in the $9.50 to $11 range; 4.7 bu. and stocks at 360 million put prices at $9 to $10.50; strong yields of 45.5 bu. takes stocks to 416 and prices drop to $8.50 to $9.75.


"If the corn yield drops under 160 bu., the top could blow off," he says. "We don’t think it will happen but should the yield end at 164 or more, then corn is very overpriced at $4.50. USDA’s estimate at 162.5 is close to where we think the final will be. Supply-driven (bad yield) bull markets normally peak before harvest is complete or just after. This year, it will all be over before the end of December."


Doane Agriculture Report. Dan Manternach of Doane’s Agricultural Report says their yield and production forecasts are very close to USDA’s September figures. "If we had to speculate on direction in the October estimates, we’re more inclined to suspect lower numbers, particularly for corn," he says. Manternach notes "in addition to record daytime highs this summer, we had record-high nighttime lows in 37 states this summer and research has shown that has adverse impacts on yields because it diminishes grain fill, something less likely to be picked up by field measurements and more likely to show up in actual yields once combines roll."


The Gulke Group. Jerry Gulke of the Gulke Group expects the final corn yield to slip from USDA’s September estimate of 162.5 to 161 bu./acre. "Furthermore, I believe the June 30 planted acreage figure to be revised downward 500,000 because of prevented plantings," he says. The combination plus minor differences in usage categories would drop corn carryover from the 2010 crop to just 842 million. Gulke doubtgs USDA will ever print a carryout under 1 billion and would revise usage to keep carryover manageable, insinuating that price will rise enough to ration demand.


"We will need two to four million more acres next year; three could happen if U.S. bean carryover stays over 300 million," he says. Gulke believes we will see a modest uptick in soybean yield, to 45 bu./acre versus USDA’s September estimate of 44.7 bu. Gulke’s usage numbers are slightly stronger, however, and he forecasts carryout next summer at 313 million, slightly tighter than USDA’s 350 million estimate. The market is looking for similar number and is ill-prepared for anything under 42 bu.


Pro Farmer. Pro Farmer projected a corn yield of 164.1 and a range of 162.5 to 165.7.Based on conditions since Aug. 20, they lowered their yield to 162.5 on Friday—the bottom of their range and equal to USDA’s September report. They also narrowed their range either side of that estimate, to 161.7 to 163.3.


"Very likely, traders are looking for a final yield close to the one from Informa Economics at 158.5 bu. per acre," says Pro Farmer Editor Chip Flory. "A USDA corn yield estimate on Oct. 8 close to that number would undoubtedly have traders looking for an even lower estimate in the November update and would be a positive for corn futures. An estimate over 160 bu. per acre would be neutral to negative and an estimate above 162.5 bu. per acre would be a negative for prices."


Stewart Peterson Group. "Currently, it is difficult for anyone, including USDA, to get a good handle on where the average yield is, due to extreme variances of disappointing yields and above-average yields," says Brent Sandahl of Stewart-Peterson Group. "So far, a majority of yield reports coming in are disappointing. This is mainly the corn in the southern half of the Corn Belt and the early-maturing corn.

"Corn yields in the northern Corn Belt are expected to be above average and the longer-maturity corn is expected to be better than early varieties. So the issue will be whether the latter offsets the former."

The trade will be watching whether or not USDA increases planted acres by roughly 1 million, Sandahl adds. "This could take some sting out of a drop in yields. Right now the market is trading a yield of roughly 160 bu./acre, which is below the September estimate of 162.5. The market looks to be headed to the $5.50 level, give or take 25¢, as it factors in a 158 to 160 bu. yield while holding demand estimates steady. For the market to maintain this price level, we will need to see USDA come in with a yield of 160 bpa or less and keep demand and planted acres steady."

Currently, the bean market is the opposite of corn, says Sandahl. "We are hearing early-maturing beans coming in above expectations. The market is nervous that hot and dry August weather may have reduced yields in later-maturing beans and Sudden Death Syndrome may have taken a poll in some areas. At current price levels, the market is hesitant to trade the September estimate of 44.7 bu.

In the October supply–demand report, if yields remain the same, it would give the market more comfort in accepting this yield as a reality, which could allow prices to move lower. A lower yield will fuel the market’s current fears and allow bean prices to move higher. A curve ball could be a change in planted acres, although we are not currently hearing any market chatter expecting one. USDA typically makes a needed acreage adjustment in the October report if one is needed. Demand will likely remain steady as it may be too early in the marketing year to see a drastic change."

Top Farmer Intelligence. "Yield projections for corn are challenging this year due to extreme weather that different parts of the Midwest experienced," says Bryan Doherty of Top Farmer Intelligence. "History suggests that once yield jumps as it did last year, it rarely repeats the following year. A yield less than 160 bu., or carryout under 800 million drives prices to $6 to ration supply and buy enough acres for next year."

Soybeans could see a bump up in yield, he adds. "Carryout over 350 million suggest a downside of $9 November futures, but if yield drops to 43 bu., then carryout drops into the mid-250 acre. This suggests prices between $9.50 and $10.50. If prices break out above $10.50, a technical objective of $13 is the next upside target."

Acres for 2011. Gulke’s working number for 2011 planted corn acreage right now is 90 million and soybeans, 76.9. He projects ending stocks from the 2011 crop rising slightly from 2010—970 million bushels for corn and 333 million for soybeans, suggesting the acreage battle next spring could be intense, especially after the February crop revenue average price is fixed.


Action. As a producer, a floor needs to be established to protect profitable levels in this market environment, Sandahl believes. "One can buy a March corn put and sell a March call option to allow for some upside but set a floor price just below the current market. The short call is marginable and does establish a price ceiling above the market. If one is hesitant on margin calls, just a straight March put option would establish a floor, but at a level below the prior strategy."

November soybeans’ initial upside objective $10.75 to $10.80 with strong buying over 1050," says Sandahl. "A move over $10.80 could signal a run to $12.90, the 2009 high on the front-month continuation chart. Heavy selling below $9.90 would signal a move back down to $9.40 to $9.25.

For unpriced 2010 beans, one should look to establish a floor by purchasing a March put option, spending around 40¢/bu. For more aggressive traders, selling a March call option in addition to purchasing the March bean put could improve the floor price. However, this would establish a price ceiling and is a marginable position."

Producers need to be prepared for just about anything," Doherty says. "Market scenario planning will help map out strategies regardless of what the final numbers are. Farmers should be asking themselves ‘What happens if prices go up a little, or a lot? What if prices are lower—a little or a lot?’ Being prepared with a strategy will help manage price volatility."



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