Week of extended losses
Grains extended their losses this week, with a recovery early week only to be met by increased selling yesterday that led to another washout in market price levels.
We are now breaking below support levels that held last week prior to the recovery early this week. Now it opens up more downside potential in the grains, and it is becoming a little scary when looking at charts at how low prices can go as we commence harvest of late season fall crops.
Charts indicate potential targets for corn at $4.50-$5 and soybeans at near $10, with wheat also basically priced as a feed grain it could see price pressure as well if corn loses value. The big dog of the grain market is always corn, and early this year USDA's aggressive cuts in projected corn yields led to a price rally all the way into July and early August. USDA has now cut yields to 148.1 bu/acre, well below 'trend' yields of near 162 bu/acre. Usually if there are aggressive cuts in the August and Sept. reports, the cuts continue into the Oct, Nov, and Jan reports so that those yields eventually end up at the lowest point in the Jan final yield report. However, this year USDA was so aggressive in cutting yields that it appears that from this point forward, it is even possible that yields will be hiked in future reports.
Currently, Pro Ag yield models suggest a corn yield at 156 bu/acre, with USDA already over 1 standard deviation smaller than the current yield model suggests. The odds of a yield being as small as USDA's current projection are less than 15%, and those odds continue to be reduced as we get closer to harvest of the crop. Now, yield models won't seem to matter as much as actual harvest yields, but so far those yields seem to be coming in better than expected. "Better than expected" is the acronym for larger yield projections coming out of USDA, and that does seem to be possible. While the exceptional heat in July did trim corn yield potential by 'tipping' corn cobs, the exceptional cooling in August followed by intermittent showers seems to have filled corn cobs in fine fashion - with large diameter cobs seemingly making up for some of the pollination problems in July. Overall, it seems the worry that we would 'run out' of corn in the world is quickly abating, especially considering the good yields coming out of many parts of the world in 2011 (including Ukraine, Russia, and the EU).
The turnaround in world yield potential has been substantial since July, with many countries piling up improved yield prospects in 2011. Since early August, US weather has also improved with cooling temps a major change which likely impacted soybeans the most. While USDA aggressively cut soybean yield potential 2 bu/acre in the August report to 41.4 bu/acre, today in late September it seems clear that USDA was too aggressive in these cuts. Pro Ag yield models still indicate a soybean crop much better than recent USDA projections (even after a hike in the Sept report to 41.8 bu/acre), with the yield prospects now indicating a crop of 42.5 bu/acre.