Is the Nation’s Corn Yield Estimate Too High?
Corn futures have been trading in a sideways price range ($3.42 to $3.88) for more than three months. We term this as base-building.
The inability for December futures to retest last year’s low ($3.37 December 2017 futures) after recently sinking to $3.42½ and then turning higher is a supportive factor heading into harvest.
Despite negative USDA Crop Production and Grain Stocks reports in September, futures climbed to near $3.70. Harvest delays due to weather may have something to do with the recovery. Yet, others may argue that record demand and a lack of farmer selling may be the reasons.
Another consideration is whether the USDA yield estimate at 181.3 bushels an acre is too high. This is nearly 5 bushels an acre larger than last year’s all-time record yield of 176.6 bushels.
It’s still early in the harvest season to make strong conclusions (26% harvested as of September 30). Feedback, so far, suggests yield variability, and many are indicating their crop may not be as large as last year’s.
This has been a strange year weather-wise, as spring had much of the Western states broiling in hot and dry conditions, while portions of the north-central Midwest struggled with too much moisture. Yet, the crop did eventually get planted, and much-needed rainfall fell where needed.
Yield reductions, however, are expected in both regions. A dry stretch through most of July for the southern third of the Midwest also suggests that top-end yields are diminished.
Despite all of these challenges, the USDA’s most recent yield estimate was a bit of a surprise, as it exceeded the previous month’s estimate by 2.9 bushels an acre. In addition, the August estimate was a surprise at 178.4 as compared with prereport estimates near 177 bushels. The question is whether yield reductions are in store on future reports.
Declining world inventories, along with increasing world demand, is setting the stage for a potential price rally. To prepare for this, consider purchasing call options and setting sell targets at higher prices. When prices rally, your sell orders will be triggered, and you will have reownership in place. Consider September or December calls to capture enough time.
Many commodity prices have risen this past year with energy markets leading the surge. As volatility and commodity prices heat up, it reminds us of 2005-2007, when prices seemed to grab traction and begin to move higher regardless of fundamentals. Then they exploded with the equities in 2008.
High volatility could be in store, as demand for corn is outpacing supply. Those who are well balanced by making responsible cash sales and having ownership through the use of fixed call options may fare best.
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext. 129.
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