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"Based on a number of weather, disease
and inspect problems now being reported, that pattern of decline may
be experienced again this year," said Darrel Good. "This year, then,
does not seem to be a repeat of 1994, a year in which midseason
predictions for good corn and soybean crops held up.
"Perhaps the pendulum has swung too far
from spring worries about crop size to an overestimate of production
potential. If so, corn prices may be nearing a seasonal low. Soybean
prices may have more downside risk, however, if production rebounds
in South America."
Good's comments came as he reviewed
recent actions in the corn and soybean markets. December 2004 corn
futures traded to a contract low of $2.25 on July 30, $1.165 below
the contract high reached on April 8. November 2004 soybean futures
traded to $5.68, $2.34 below the contract high reached on March 25.
The favorable development of the 2004 U.S. crops is one of the
factors contributing to the sharp decline in prices.
"In trying to judge future price
direction, it is important to determine what size U.S. crops are
reflected by current prices," Good said. "There is no direct way to
answer that question, but some perspective can be provided by
analyzing the level of 2004-05 marketing year ending stocks implied
by the current price level."
First, current futures prices need to
be translated into an average marketing year farm price for the
2004-05 marketing year. That is done by adjusting futures prices by
the three-year average basis in each month from September 2004
through August 2005. This adjustment produces an average monthly
cash price for the marketing year, which can be weighed by the
five-year average percentage of the crop that producers have
marketed in each of those months.
"That process suggests that the market
currently reflects a 2004-05 marketing year average farm price of
$2.20 for corn and $5.64 for soybeans," said Good. "Recognizing that
a portion of the 2004 crops have already been priced by farmers at
higher prices, the marketing year average price reflected by current
futures is actually slightly higher than these calculations. Those
prices may be closer to $2.25 for corn and $5.75 for soybeans."
Next, Good said it is necessary to
calculate the level of year-ending stocks implied by these prices,
based on historic relationships between the ratio of year-ending
stocks to use and the marketing year average price.
"This process, however, should be used
with caution for a variety of reasons," Good noted. "The
relationship between the ratio of stocks to use and price is less
than perfect; the relationship appears to have shifted over time;
and, at best, the procedure is a shortcut for analyzing market
supply and demand fundamentals.
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"The results are a starting point in
judging prices and potential price changes. Taking those
shortcomings into account, one can proceed with the calculation."
Based on the relationship between the
ratio of year-ending stocks to use and the marketing year average
farm price from 1998-99 through 2003-04, a corn price of $2.25
implies a 2004-05 marketing year ending stocks-to-use ratio of 11
percent. Assuming that use of corn during the 2004-05 marketing year
will be near the 10.555 billion bushels projected by the USDA, the
market apparently expects year-ending stocks to be near 1.16 billion
bushels -- 11 percent of 10.55 billion. If stocks at the beginning
of the marketing year, Sept. 1, are near the current USDA projection
of 896 million bushels and imports are at 5 million bushels, the
market is reflecting a crop of 10.8 billion bushels. Using USDA's
projection of harvested acreage, a crop of that magnitude would
require a U.S. average yield of 147.3 bushels per acre, which is 5.1
bushels above last year's record yield.
"Following the same process for
soybeans, the market appears to be expecting 2004-05 marketing year
ending stocks of 380 million bushels, or about 13.4 percent of
USDA's projected use of 2.84 billion bushels," said Good. "With
beginning stocks of 105 million bushels and imports of 5 million
bushels, a crop of 3.11 billion bushels is implied. Again using
current USDA estimate of harvested acreage, a crop of that size
would require a U.S. average yield of 42.2 bushels -- 0.8 bushels
above the 1994 record.
"The relationship between stocks of
soybeans and marketing year average price has been less stable for
corn over the past six years, so we have less confidence in the
results for soybeans."
While the above analysis has
shortcomings, it is clear that the corn and soybean markets are
expecting very large U.S. crops in 2004. Are yields near the
calculated levels possible? Does that mean there will be a repeat of
1994-type yields?
"Over the past 18 years, there has been
a fairly strong correlation between the percentage of the crop rated
good or excellent in the USDA's final crop condition report of the
season and the U.S. average yield," said Good. "If condition ratings
as of July 25 -- 77 percent good or excellent for corn and 69
percent for soybeans -- hold up through the rest of the season, the
model projects U.S. average yields for 2004 at 150.2 bushels for
corn and 42.1 bushels for soybeans.
"In 1994,
ratings at this time of year were 86 percent good or excellent for
corn and 83 percent for soybeans. By the end of the 1994 growing
season, 86 percent of the corn crop and 79 percent of the soybean
crop were rated good or excellent."
[University
of Illinois news release]
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