MGEX is looking at initial 2010/11 winter wheat condition ratings which were released by USDA on October 25th, 2010. The trade talks about the good to excellent ratings even though USDA does publish additional ratings of fair, poor and very poor.
Be certain to understand winter wheat condition ratings in the fall are carried over into the following harvest. It is important to follow the ratings on a week by week basis going into the harvest as it may have a profound impact on futures as well as its spreads.
The initial 2010/11 USDA ratings of 47% good to excellent are the weakest dating back to 2003. MGEX analyzed the initial ratings and then analyzed again just before the following year’s winter wheat harvest. The good to excellent conditions drop into harvest vs initial condition ratings five out of seven years, with one year higher and one year unchanged.
Of the five years down the worst drop was 29% just before the 2006 harvest and the smallest drop of 8% just before the 2008 harvest. The average drop in the five years was 19.4%. As to how these conditions drop and its impact on yield the direct answer is less than correlated.
Even though conditions may have dropped in five of the years from its initial to early harvest, the yield drop during the condition drop was higher than the previous year in three of the years. Even though the futures trade may pay particular attention to the weekly condition reports they do not have a high correlation to yield performance.
Pay particular attention to the fact since 2003 the yield drop year on year has been four of the last seven years. In the weak good to excellent condition years the perception is to have new crop futures to outperform the old crop futures.
In conclusion be aware of the weather developments for weekly crop conditions but do not rely upon these same condition reports as the roadmap to yield performance.