Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
August 13, 1999

Phooey!

Actually I might have to admit to saying something somewhat stronger than phooey when I saw Thursday's USDA report. For the last few weeks reports of widespread dry weather and damage to the corn crop has been reported. In much of Central Missouri, it's more than reports--crop damage is real! Weekly USDA crop condition reports have shown declining crop condition and yield models (using these crop condition reports) have shown reduced yields. Everyone expected this to show up in the report which bases it's estimate on August 1 conditions. That didn't happen!

USDA estimates corn production will be 9.561 billion bushels coming from an average yield of 134.7 bushels per acre. That would be the second highest yield (second only to 1994's 138.6 bpa and ahead of last year's 134.4) and the third largest crop (behind only 1994 and 1998). Will the crop be this good? It caught many analysts off guard and they are trying hard to explain it. It's very hard to believe that the hot and dry weather hasn't had more effect on yields. Keep in mind, while this is a "surveyed" report, they counted populations but they did not measure ear size. Plant populations keep increasing, but it takes ears to make yields. It's likely that the report will continue to be questioned during the next few days, but it suggests corn production will be better than most of us were expecting.

Soybean estimates were more in line with what the grain trade was expecting. Production was reduced somewhat from earlier projections with an estimated crop of 2.87 billion bushels and this was about what everyone expected, so this wasn't a surprise and shouldn't affect the bean market much, right? Wrong! The reaction of both the corn and soybean markets to this report was limit down!

What does this mean for our market strategies? Both corn and soybean futures prices had rallied sharply in the last month, mostly in response to the hot and dry weather conditions. Cash price increases were less impressive due to weak basis. This was disappointing for anyone holding old crop (1998) corn or beans. However, today's price action really dampens any hope to salvage any increased returns from these.

Actually this report and the market reaction to it doesn't affect new crop strategies that much--at least not yet. While December corn futures prices had rallied sharply, Central Missouri new crop cash bids were only about a dime or so above loan price due to the weak basis. I calculated a December corn put option strategy, earlier this week, which would have protected a price floor at about loan price. The market loan or LDP does this! The sharp rally in November soybean futures was at prices well below the CCC loan rate, so the loan or LDP still offered more than the market. There might have been some strategies to enhance price using the LDP, but they would have been very risky in the volatile weather market--especially when we were expecting more crop damage to show up in the USDA report. For now, it appears that being prepared to use the market loan or the LDP remains the best early strategy for new crop. Still, you have to wonder about a USDA report that shows bean production hurt more than corn when everyone else expected exactly the opposite! -- Melvin


University of Missouri ExtensionDecisive Marketing - August 13, 1999
http://outreach.missouri.edu/agconnection/DCT/DM990813.html -- Revised: April 20, 2004
breesm@missouri.edu