"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,"
said Darrel Good. "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 a 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."
Good's comments came as he speculated
on the Sept. 11 USDA estimates on the potential size of the 2003
corn and soybean crops. These estimates will be the most important
price factors for several weeks, or longer.
"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," said Good. "One approach is to examine the magnitude of
price changes that occurred 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 Aug. 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," said
Good. "On Aug. 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 changes about 5 cents per bushel.
[to top of second column in
"Currently, December futures are 13
cents higher than following the release of the August crop estimate.
Does that imply the market believes the crop is about 260 million
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 billion to 9.93
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
three-billion-bushel crop. On Aug. 11, November futures settled at
The average trade guess for the USDA
soybean crop estimate was reported at about 2.94 billion bushels. On
Aug. 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 cents per bushel for each
100-million-bushel change in expected crop size," said Good.
"Currently, November futures are trading about 40 cents 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 [billion] to 2.76 billion bushels."
The corn market appears to be trading a
2003-04 marketing year supply (production plus Sept. 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," said Good. "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.
about 15 cents higher than the average of the past year," said Good.
"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
of Illinois news release]