Crop ratings have a tendency to decline from mid-July through the season's end. The question is, what will happen this year, with the prospect of record supplies in the prediction pipeline?
"Based on weather, disease, and inspect problems now being reported, that pattern may be experienced again this year," says Darrel Good, University of Illinois crop specialist. He doesn't think that this year will be a repeat of 1994– a year in which mid-season predictions for abundant corn and soybean crops held up.
"Perhaps the pendulum has swung too far from spring worries about crop size to an over-estimate of production potential. If so, corn prices may be nearing a seasonal low," says Good. "Soybean prices may have more downside risk, however, if South America's production rebounds."
On July 30, December 2004 corn futures traded to a contract low of $2.25 per bushel. That's $1.165 below the contract high reached on April 8. November 2004 soybean futures traded to $5.68 per bushel, $2.34 below the contract high reached on March 25.
"In trying to judge future price direction, it is important to determine what size U.S. crops are reflected by current prices," Good notes. "There's no direct way to answer that question." However, you can gain some perspective by analyzing the 2004/2005 marketing year-ending stocks implied by the current price level.
He recommends the following:
First, current futures prices need to be translated into an average marketing year farm price for the 2004/2005 marketing year. That's done by adjusting futures prices by the three-year average basis in each month from September 2004 through August 2005. This produces an average monthly cash price for the marketing year, which can be weighed by the five-year average percentage of the crop that producers have marketed in each of those months.
That process suggests that the market now reflects a 2004/2005 marketing year average farm price of $2.20 a bushel for corn and $5.64 for soybeans," says Good. "Recognizing that farmers have already priced a portion of the 2004 crops at higher prices, the marketing year average price reflected by current futures is actually slightly higher than these calculations. Those prices may be closer to $2.25 a bushel for corn and $5.75 for soybeans."
Next, it's necessary to calculate the level of year-ending stocks implied by these prices based on historic relationships between the ratio of year-ending stocks to use and the marketing year average price.
"This process, however, should be used with caution," Good notes. "The relationship between the stocks-to-use ratio and price is less than perfect; the relationship appears to have shifted over time. At best, the procedure is a shortcut for analyzing market supply and demand fundamentals."
He says, the results provide a starting point in judging prices and potential changes. If you take those shortcomings into account, you can proceed with the calculation.
Based on the relationship between the year-ending-stocks-to-use ratio and marketing year average farm price from 1998/1999 through 2003/2004, a $2.25 per bushel corn price implies a 2004/2005 marketing year ending-stocks-to-use ratio of 11 percent. Assuming that corn use during the 2004/2005 marketing year will approach USDA's 10.555-billion-bushel projection, the market apparently expects year-ending stocks to be near 1.16 billion bushels.
If stocks on Sept. 1, 2004, are near USDA's 896-million-bushel projection, and imports are at 5 million bushels, the market is reflecting a 10.8-billion-bushel crop. Using USDA's harvested-acreage projection, a crop of that magnitude would require an average yield of 147.3 bushels per acre, 5.1 bushels above last year's record yield.
"Following the same process for soybeans, the market appears to expect 2004/2005 marketing year ending stocks of 380 million bushels– or 13.4 percent of USDA's projected 2.84-billion-bushel usage," says Good. "With beginning stocks of 105 million bushels and imports of five million bushels, a crop of 3.11 billion bushels is implied. Again using USDA's harvested-acreage estimate, a crop of that size would require average yields of 42.2 bushels– 0.8 bushels above the 1994 record.
While the analysis has shortcomings, it is clear that the corn and soybean markets are expecting very large U.S. crops in 2004. Are thos yields even possible? Does it mean that 1994-type-yields will repeat?
"Over the past 18 years, there's been a fairly strong correlation between the percentage of crop rated "good or excellent" in USDA's final crop-condition report and U.S. average yield," says Good. If late-July's condition ratings, which were 77 percent "good or excellent" for corn and 69 percent for soybeans, hold up, the model projects average yields for 2004 at 150.2 bushels for corn and 42.1 bushels for soybeans.
"In 1994, ratings at this time of year were 86 percent 'good or excellent' for corn and 83 percent for soybeans. By the end of the 1994 growing season, 86 percent of the corn crop and 79 percent of the soybean crop were rated 'good or excellent'," notes Good.
University of Illinois