September 8, 2003
WHAT DOES THE MARKET SAY ABOUT CROP SIZE?
The USDA will release new estimates of the potential
size of the 2003 corn and soybean crops on September 11. These estimates
will be the most important price factors for several weeks, or longer.
There is more than the usual amount of uncertainty about the magnitude
of the September estimates this year. First, the August estimates
were smaller than expected, prompting some to think that the USDA
had factored a forecast of a hot, dry August into the August estimates.
However, the USDA August estimates reflect the assumption of normal
or average weather conditions subsequent to the time of data collection.
Second, August weather conditions resulted in an historic decline
in crop condition ratings during the month. Third, widespread precipitation
arrived during the last few days of August, raising questions about
the potential yield benefits of such late precipitation. Fourth,
there is some uncertainty about the impact of adverse weather conditions
in some western states on the magnitude of acreage that will be
harvested for grain.
While it is difficult to anticipate the size
of the September estimate, or final crop size, it is interesting
to ponder what crop size is reflected in current price levels. One
approach is to examine the magnitude of price changes that occured
in July and August as production expectations changed and then to
infer current expectations about crop size from recent price changes.
This approach clearly has limitations and, in particular, assumes
that no market fundamentals except expected crop size have changed
significantly over the past two months and that the market was correctly
priced in July.
In the case of corn, December 2003 futures traded
near $2.20 in early July on the expectation of a 10.3 billion bushel
crop and reached a low of about $2.10 in late July when there was
considerable talk of a potential crop of 10.5 billion bushels. By
August 11, the day before the release of the USDA production estimate,
December futures settled at $2.18. The average trade guess for the
USDA corn crop estimate was reported at 10.29 billion bushels. On
August 12, and for the next few days, December futures traded around
$2.30, reflecting the August crop estimate of 10.064 billion bushels.
This crude analysis suggests that for every 100 million bushel change
in expected crop size over that period the price of corn changed
about $.05 per bushel. Currently, December futures are $.13 higher
than following the release of August crop estimate. Does that imply
the market believes the crop is about 260 million bushels below
the August estimate? If so, the market is currently trading a crop
of about 9.8 billion bushels. Last week’s published
guesses by private firms were for a crop in the range of 9.82 to
9.93 billion bushels.
In the case of soybeans, November 2003 futures traded around $5.30
in the second week of July on expectations of a 2.9 billion bushel
crop and reached a low of $5.10 in late July when talk centered
around the potential for a 3 billion bushel crop. On August 11,
November futures settled at about $5.30. The average trade guess
for the USDA soybean crop estimate was reported at about 2.94 billion
bushels. On August 12, and for the next few days, November futures
traded around $5.45, reflecting the August crop estimate of 2.862
billion bushels. This analysis suggests that the price of soybeans
changed about $.25 per bushel for each 100 million bushel change
in expected crop size. Currently, November futures are trading about
$.40 above the level immediately following the August crop report.
This price seems to imply an expected crop of about 2.7 billion
bushels, 160 million below the August estimate. Last week’s
published guesses by private firms were for a crop of 2.72 to 2.76
The corn market appears to be trading a 2003-04
marketing year supply (production plus September 1 stocks) that
is about 200 million bushels larger than last year’s supply.
Yet the market is offering an average price for the year ahead very
near the $2.30 average for the year just ended. The price level
implies stronger demand during the year ahead. Processing use of
corn will increase and feed use will decrease. At the margin, then,
stronger demand will have to come in the export market.
The soybean market appears to be trading a 2003-04
marketing year supply about 100 million bushels smaller than last
year’s supply. The market is currently offering an average
price for the year ahead of about $5.65. That is about $.15 higher
than the average of the past year. The current price appears to
correctly reflect current U.S. market fundamentals, if the crop
is near 2.7 billion bushels. The question is, does it correctly
anticipate a South American crop that is potentially 200 to 300
million bushels larger than this year’s harvest?
Issued by Darrel Good
University of Illinois