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[SEPT. 9, 2003]  URBANA -- There is more than the usual amount of uncertainty this year about the magnitude of USDA's September corn and soybean crop estimates, said a University of Illinois Extension marketing specialist.

"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.


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"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 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 three-billion-bushel crop. On Aug. 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 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.

"That is 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 harvest?"

 [University of Illinois news release]

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