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"Concerns about crop size may offer
producers an unexpected opportunity for additional sales as harvest
approaches," said Darrel Good. "Longer term, corn prices appear to
have additional upside potential because of strong demand, lack of
competitors and the need for the U.S. to produce another large crop
in 2005.
"Soybean price prospects beyond harvest
are more uncertain due to the uncertainty of South American crop
production and Chinese demand. For both crops, prices are now high
enough that options can be considered as a way to manage downside
price risk."
Good's comments came as he reviewed the
current state of the corn and soybean markets, both of which are
focusing on the potential size of the U.S. crops. But, Good noted,
there are, as usual, uncertainties about the size of this year's
crops even after the first USDA forecast.
"Uncertainties center on both acreage
and potential yield," he said. "The USDA's current estimates for
planted acreage and acreage harvested for grain are based on the
large quarterly agricultural survey conducted in June. Typically,
monthly crop production surveys do not revisit the acreage issue.
"The question of planted and harvested
acreage is posed in the December quarterly agricultural survey and
reported in the annual crop production report released in January.
January acreage estimates typically differ from June forecast by
less than 1 percent, but have been as large as 2 percent for
soybeans and 2.5 percent for corn."
Most questions this year center around
the potential for harvested acreage, due to early season flooding
and ponding and to the late maturity of some crops in northern
growing areas. The USDA's weekly report of crop progress indicated
maturity of the corn crop is well behind the normal pace in
Wisconsin, Minnesota and the Dakotas.
The soybean crop appears later than
usual in Michigan, Minnesota and Wisconsin.
"These 'late' states account for 21
percent of the estimated acreage of corn to be harvested for grain
and 15 percent of the expected harvested acreage of soybeans," said
Good. "Some of the acreage could go unharvested for grain if
maturity is insufficient before the first killing frost."
Good added that the lateness of the
crops in some areas, along with cool weather in the first half of
August, some dry growing areas and some early frost, also raises
concerns about the potential yield of corn and soybeans.
"The USDA's weekly report of crop
conditions showed a reduction in the percentage of the crops rated
good or excellent for the week ended Aug. 15," said Good. "However,
crop ratings are still running well ahead of last year's ratings and
above the average ratings for this time of year. Yield potential is
still quite high."
[to top of second
column in this article]
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The closing price of December 2004 corn
futures on Aug. 20 was $2.4175 above the closing price on Aug. 12,
following the USDA's forecast of a 10.923-billon-bushel crop. The
question now becomes: What size crop is the market now trading?
"Current futures prices -- December
2004 through September 2005 -- reflect a U.S. average farm price of
$2.35 for that portion of the 2004 U.S. crop that has not yet been
priced," said Good. "Assuming that some of the crop has been priced
at levels well above current prices, the average price for the year
reflected by current futures prices is near $2.40 per bushel.
"Further assuming that the market
believes that consumption of U.S. corn during the 2004-05 marketing
year will be near the USDA's forecast of 10.72 billion bushels, a
price of $2.40 reflects the year-ending stocks of 1 billion bushels
and a crop of 10.974 billion bushels, 129 million below the August
forecast. Such a crop implies a U.S. average yield of 147.1 bushels
per acre, based on the current forecast of harvested acreage. That
yield is 1.8 bushels below the USDA's August forecast and about
equal to the yield implied by current crop condition ratings."
November 2004 soybean futures settled
at $5.85 on Aug. 20, equal to the settlement price on Aug. 12, but
jumped sharply higher in early trading on Aug. 23. Current futures
prices, along with the assumption that some of the crop has already
been sold at higher prices, reflect a 2004-05 marketing year average
farm price of about $6.15 per bushel.
"It is more difficult to determine the
soybean crop size implied by current futures prices because the
recent relationship between the ratio of year-ending stocks to use
and the average farm price has not been as consistent as the
relationship for corn," said Good. "Based on the best fit of that
relationship for the period 1998-99 through 2003-04, the price of
$6.15 seems to imply a crop of about 2.83 billion bushels and an
average yield near 38.5 bushels per acre, based on the current
forecast of harvested acreage.
"That yield
is six-tenths of a bushel below the USDA's August forecast and well
below the average yield implied by current crop condition ratings.
The implied crop size is nearly 50 million bushels below the USDA's
August forecast."
[University
of Illinois news release]
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