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Market Advisor: Will the Weather Cooperate for Near Record Crop Production?

The USDA forecasts the largest soybean crop on record and the second largest corn crop.

By Frayne Olson, Crops Marketing Economist

NDSU Extension Service

The Aug. 12 U.S. Department of Agriculture crop production report forecasts the largest soybean crop on record and the second largest corn crop. However, these forecasts assume continued favorable weather conditions for the remainder of the growing season. This report is the first of several objective yield estimates for corn and soybeans. USDA field representatives walk fields, take plant population counts, record plant maturity and make yield predictions based upon historical crop development rates.

The report estimated the national average soybean yield at 44.2 bushels per acre, which would result in a record 3.2 billion bushels of total production. The national average corn yield was predicted to be 159.5 bushels per acre, just below the 2004 record of 160.3 bushels per acre. This corn yield would result in 12.76 billion bushels of total production, just below the 13.04 billion bushel record set in 2007.

The crop production report also made estimates of spring wheat and durum yields based upon farmer surveys. The national average spring wheat yield was predicted to be 41.5 bushels per acre. The North Dakota average yield estimate came in at 40 bushels per acre. The national average durum yield was estimated at 39.9 bushels per acre, which is just above the existing national record of 39.7 bushels per acre. The predicted North Dakota durum yield estimate is 34 bushels per acre.

So what does this mean for crop prices as we move into fall? On Aug. 12, the USDA also updated the World Agricultural Supply and Demand Estimates (WASDE) to reflect the new crop production estimates. Even with record forecasted total production, the soybean stocks-to-use ratio is predicted to be a relatively tight 6.75 percent, when compared with the 15-year average of 9.25 percent. The stocks-to-use ratio is calculated by dividing the ending stocks by total use. This ratio can be viewed as a measure of the “margin for error” between total production and total use. There also is a strong relationship between the stocks-to-use ratio and average market prices. As the stocks-to-use ratio decreases, average prices increase.

The tight soybean stocks-to-use ratio results from very low carryover of old crop soybeans, a firm demand base from oilseed crushers and continued strong export demand. China has been a major buyer of soybeans and canola and has increased purchases of U.S. soybeans because of drought-reduced production in Argentina and Brazil. Prices for both old and new crop soybeans are expected to remain strong and be very volatile. Any weather scare that has the potential to reduce average soybean yields, such as extreme heat or an early frost, will cause prices to increase rapidly and build a risk premium into the markets. A weather-related price rally should be used to price any remaining old crop inventories. Additional new crop sales should be considered, but the yield potential for your existing crop needs to be considered carefully. Aggressive forward pricing can create additional risks if farm level yields do not meet expectations.

The corn situation is much different from the soybean situation. The new crop corn stocks-to-use ratio is estimated to be 12.6 percent, which is below the 15-year average of 14.4 percent. However, this is not considered worrisome because of the large planted acreage, very strong national yield potential and comfortable old crop inventories. In addition, the updated WASDE report forecasts an increase in feed, ethanol and export use because of lower price projections. Some market analysts are questioning this increased use because of the very competitive international markets, financial difficulties in the livestock sector and the slow financial recovery of the ethanol industry. These questions surrounding the strength of demand have been overshadowed by the more immediate uncertainty about supply.

The major short-term issue in the corn market is the national average yield figure. The western Corn Belt has had near ideal planting and summer weather conditions, so a monster crop is expected. However, the eastern Corn Belt was wet this spring, which delayed both corn and soybean planting. The relatively cool summer temperatures have not stressed crop development, but have left it vulnerable to an early frost. The unanswered question is will the fall weather conditions be favorable and result in near record production or will the eastern Corn Belt be disappointed with lower yields, which will reduce the available new crop supply. Long-term weather models are not yet reliable enough to make accurate predictions, so only time will tell.

The North Dakota corn crop also was planted late and the cool summer temperatures have raised serious concerns about the chances of the crop reaching maturity. However, low yields or frost- damaged corn in North Dakota may not trigger much of a market response if the core Corn Belt states have good yields. The crop production report estimated the North Dakota corn yield at 118 bushels per acre, which is just above the 10-year average of 115.5 bushels per acre. If the average North Dakota yield drops to 105 bushels per acre, which was the state average yield in 2004, the lost bushels could be recovered by an increase of 1.8 bushels per acre in the Illinois corn crop. This would be a move from the current Illinois estimate of 175 bushels per acre to 176.8 bushels per acre, which is still below last year’s actual average yield of 179 bushels per acre. Both cash and futures market traders are watching the crop development in the eastern Corn Belt very closely.

The wheat market is feeling very comfortable with the available supplies and wheat prices will be a follower to soybeans and corn if any harvest price rallies are realized. There are good old crop inventories, both domestically and internationally. Both hard red winter and soft red winter wheat yields were good and the spring wheat and durum crops in the northern Plains look excellent. The current wheat stocks-to-use ratio is projected to be 33.5 percent, which is above the 15-year average of 26.8 percent. One key unanswered question is the quality of the northern Plains and Canadian spring wheat and durum crops.

The soft red winter wheat quality was near the five-year average test weight and protein content. The early reports from the hard red winter wheat harvest are that test weights are good, but the protein content is below average. In addition, high spring wheat yields tend to result in lower average protein contents. This suggests that the premiums for protein above 14 percent may strengthen. However, the discounts for protein below 14 percent may not change because of the large volume of lower protein wheat.

U.S durum prices are heavily influenced by the quantity and quality of the Canadian durum crop. The Aug. 7 outlook report from Agriculture Canada shows that 2009 Canadian durum production is forecasted to be 11 percent lower than 2008 and that ending stocks are predicted to be 27 percent lower than 2008. Part of the reduced production is due to lower planted acreage and the rest is due to very dry conditions in Alberta and western Saskatchewan. Canadian spring wheat and durum crop development also is behind average because of cool summer temperatures. These crops also are vulnerable to an early frost. The weather forecasts for the Canadian Prairie Provinces will be watched closely by the spring wheat and durum markets to try to anticipate any supply or quality concerns.


NDSU Agriculture Communication

Source:Frayne Olson, (701) 231-7377, frayne.olson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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