Record-high yield models and bullish reports
The 2013 crop continues to improve in yield potential, with the corn and soybean crops now suggesting their highest yield rating of the year this week, and in an ominous sign for prices, RECORD-HIGH levels. This is in sharp contrast to USDA projections in August released yesterday, which LOWERED the yield potential for corn and soybeans both 2 bu/acre (a large reduction in soybeans!) from July. However, the Pro Ag yield models are up 7 bu/acre in corn from July 1, and up 1 bu/acre in soybeans. What gives?
Some are suggesting that USDA wants to keep prices up to prevent large loss payments from crop insurance. If they keep yields elevated through October from actual yield potential, maybe they can prevent some of the large crop insurance indemnities. Or maybe, due to the late crop development, USDA methods are missing part of the yield potential of this crop. Or perhaps USDA is projecting an early frost? Regardless, this ill-advised USDA report is not worth the paper it's printed on, and should not be relied on to get bullish grains at a very ill-conceived time. In fact, weather forecasts are now suggesting warming temps for northern growing areas, along with rain in the central and northern Corn Belt for the 8 to 14-day forecast - just what is needed to produce a record-shattering crop in 2013.
Pro Ag yield models from crop conditions continued to improve yesterday, and now reflect record-high yield potential of both corn (165 bu/acre, up 1 bu/acre this week) and soybeans (44.83 bu/acre, up .24 bu/acre this week). So the reduction by USDA was ill-advised, as the yield model since July 1 has risen 7 bu/acre in corn and 1 bu/acre in soybeans! I can't for the life of me figure out where USDA numbers are coming from, unless you believe that USDA is trying to prevent prices from deteriorating enough to trigger losses in crop insurance in all crops.
For if USDA can keep prices up until October given record-large yield potential, then maybe they can reduce these payments? Trouble is, though, most funds also know the true yield potential, so there will just be more money made on the downside from anyone who believes these USDA projections. The only way USDA will be even close is with a very early frost, and the forecasts now are suggesting warming weather in the extended forecast (8 to 14-day and 6 to 10-day for northern areas). The extended forecast also features wet conditions for the northern corn belt in the 8-14 day forecast as well (bearish).
Regardless of the ill-advised USDA cut in yields, this has given us the opportunity to reestablish short positions in soybeans (at $12.25 Nov. beans) and will likely in corn (at 4.80-$4.90 Dec). Corn should rally further to near $4.90 on the large upside reversal from yesterday, so this should provide us an opportunity to get short if not already in place on earlier recommendations. Soybeans even have a chance of rallying to $12.60 before running into overhead resistance, but these are great prices to get short again.
As we forewarned in last week's comments, Pro Ag anticipated a bounce after the recent washout in prices back to near $12.30 Nov. soybeans and $4.90 Dec. corn, at which time we would once again recommend sales.
Today we recommend after the USDA report-based bounce that specs sell Nov. soybeans at $12.38, and sell double the amount at $12.575 Nov. Target $4.79 to sell short Dec. corn, and double those sales at $4.885 Dec. Hedgers can rehedge at these levels as well.
Pro Ag notes that crop conditions are still way above last year at corn rated 64% G/E (same as last week) vs. only 23% last year, with corn 94% silking (only 1% behind average) and 32% dough (vs. 48% average) and 5% dented (vs. 17% average). Soybean conditions were also 64% G/E (same as last week) vs. only 30% last year, and 58% setting pods vs. 68% normally and 88% blooming vs. 92% normally. The only possible reasoning why USDA is so low in yield is the late development: Did that throw them off? Other crops are also showing excellent yield potential, with cotton rated 43% G/E (but down 2% last week), vs. 42% last year. Peanuts improved to 65% G/E (up 2%), with sorghum 53% g/E, up a large 6% and well above last year's 25%! Ironically, USDA also lowered sorghum yield potential as well in yesterday's ill-advised report.
Winter wheat is 92% harvested, ahead of 91% average with HRS wheat 6% harvested, well behind normal of 24% harvested. The HRS wheat condition was rated 66% G/E, down from 68% last week and vs. 61% last year. Oat conditions were steady at 55% G/E. Barley conditions were 66% G/E, up 1% from last week and harvest is 17% complete vs. 21% normally.
As we stated last week, Pro Ag remains bearish, as the crop continues to develop in mostly good weather. Final downside price targets are still $4 Dec corn, $9.50 to $10 Nov. soybeans, and $6 CBOT wheat. Essentially, we have the makings of a record-large crop, and prices should sag into harvest as the result of this above-average crop year in 2013.
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