Declining corn, soybean yield potential bullish
Corn and soybean conditions have been declining fairly rapidly the past 3 weeks, with corn in a position where there is no room for a crop size less than the current projected 163.5 bushel/acre yield in the June USDA report. With the smaller acreage reported in the June 30 report and smaller stocks numbers, its likely USDA will cut corn carryout significantly already without any change in yield, possibly even to as small as 1.1 billion bushels/acre carryout.
While some analysts on the bearish side of the trade expect USDA to hike corn yields to offset some of the bullish numbers, Pro Ag is not in that camp. Instead, Pro Ag yield models suggest the past month has been hard on corn potential yield, with our yield model dropping from an early 164.5 bushels/acre yield to now be at barely 159 bushels/acre. That represents another 5.5 bushel/acre decline in yield potential the past 4 weeks, in other words another loss of 440 million bushels of production! So recently the crop has been going backwards from its lofty early expectations, and only good growing weather from here on out can reverse this trend of lower yield potential in the corn.
This is making this summer much more interesting due to the importance of the growing crop to carryout of corn. Already, the huge demand and shrinking supplies had the attention of the trade, but now that the crop size and yield potential is continuing to shrink it is becoming a critical time for the corn crop. If corn crop size is smaller than 160 bu/acre, its likely we will be feeding a significantly larger amount of wheat to make up for the shortage of corn supplies for feed use. It's altogether possible USDA will need to hike wheat feed use significantly for 2010/11, leaving wheat supplies much smaller than current estimates of 1 billion bushels or more.
In fact, wheat feeding of another 200 million bushels would cut ending stocks rather than increase them (as many expected after the larger stocks and acreage number on June 30). So all of a sudden, the turnaround in corn expectations from a bumper crop early and adequate stocks has turned into one where both corn stocks and wheat stocks might be limited in availability. And that is in spite of an expected hike in 2009/10 ending stocks and a likely hike in winter wheat production estimates in this report.
So things are getting more interesting this summer, with the corn the real bull story behind grains. But as many say, as corn goes so does the US futures prices of most grains, and with corn dominating the production side of the U.S. balance sheet for grains (13 billion bushels of production versus 2 billion wheat and 3 billion soybeans). With a shrinking corn yield potential in the field, that makes for a bullish situation in all grains for now.
In spite of all the bullish expectations in the coming report and all the bullish production information in the fields right now (with declining yield potential of corn and soybeans), one has to constantly be conscious of the importance of the growing crop in the field and its potential to be constantly changing. While we may get our bullish report Friday for corn and wheat (and to a lesser extent, soybeans) it might be the last bit of bullish news for awhile.
Weather forecasts recently seem to be improving, and one has to be on the lookout for a change in yield potential from a declining yield to one where yields could potentially start to improve again. Weather had been wet in the west and north and dry in the southern U.S., but now the forecast seems to be shifting to one of wetter in the eastern corn belt and Delta and drier in the west. We'll see if this current forecast materializes, or if its just a pipe dream of forecasters in the NWS. For now, though, the trend is up with declining yield potential the past 4 weeks, and for now that trend is still worth riding.
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