If the old adage "big crops become bigger" rings true, the bearish supply narrative for U.S. corn and soybeans will flourish all the way into January, and possibly beyond.
In its monthly crop production report on Wednesday, the U.S. Department of Agriculture struck down analysts’ assumptions of a shrinking domestic corn crop with a yield projection of 175.3 bushels per acre, some 1 percent higher than both last month’s estimate and market expectations.
This figure marks the largest prediction of corn yield to date from USDA’s National Agricultural Statistics Service, edging out the agency’s August estimate of 175.1 bpa, which was its first of the season. This month’s figure will also be NASS’s last revision of both corn and soybean yields before the final numbers are published in January’s annual crop production report.
Many industry analysts use historical month-to-month changes in USDA estimates – along with several other pieces of data – to gauge the likely direction of forthcoming yield predictions. But this time, the method led many market-watchers astray as prior monthly adjustments would have suggested further downside to corn yield.
Unprecedented Corn Adjustments
Since 1974, there have been only six instances in which USDA dropped U.S. corn yield in both the September and October reports only to increase yield in November (1976, 1984, 1986, 1987, 2012, 2016).
But 2012 was a vastly different situation than 2016. When considering how NASS’s August yield differed from the World Agricultural Outlook Board’s initial long-term trend yield – which is the benchmark yield from February to August – the August yield was 16 percent below the trend in 2012 but over 4 percent larger this year.
Further, WAOB did not appear to publish U.S. trend yield estimates before the 1993/94 cycle, so there is truly no precedence for the pattern in this year’s USDA corn yield projections.
This may leave analysts uncertain as to what final yield will be in January, especially after being justifiably warned of a smaller corn crop based on the perpetual summer heat. But in the wake of a hefty November number, the bottom line is simple: the crop is huge.
The past 42 years can help establish an expectation range for 2016/17 corn yield in January. Using the maximum November-to-January swings on both ends places the ceiling at 180.4 bpa and the floor at 171.2 bpa.
The floor is the most telling number because it implies that even the worst-case scenario for the corn crop leaves bearish supply-side overtones in the U.S. market. And prices could come under further pressure in the United States if its primary competitor, South America, has a flawless growing season.
Big Beans Stay Big
The United States and South America are even bigger trade rivals when it comes to soybeans, meaning that soybean prices could also come under a great deal of pressure should Brazil and Argentina churn out a bumper bean crop.
NASS’s pump-up of U.S. soybean yield from 51.4 bpa in October to 52.5 bpa this month surprised approximately nobody, although the magnitude was a bit larger than the 52 bpa that the trade was anticipating.
But this yield estimate – a staggering yield 9 percent higher than last year’s record – may have approached the upward limit.
There have been five years in the past 51 where NASS increased soybean yield each month from the initial August figure to the January final (1978, 1979, 1992, 2005, 2009). However, in the latter two years, the August estimate came in modestly below WAOB’s initial trend.
In 2016, USDA increased U.S. soybean yield at every chance – from the WAOB trend all the way through to Wednesday’s number, a pattern which has never before been seen. The exception to this is 1992, during which NASS appeared to have issued a soybean yield estimate for the first time in July rather than August, and each successive estimate increased thereafter.
Applying the full range of past scenarios to 2016, final soybean yield could land anywhere from 49.5 bpa to 55.6 bpa, but based on this year’s prediction trends, yield is unlikely to move out of the 52 range.
That means the sizes of this year’s U.S. corn and soybean crops would be unprecedented and there is room for them to expand even further, if history is any indication.