"It is a useful exercise to try to determine the average yield
that is being reflected by the market at any given time," said
Darrel Good. "With considerable uncertainty on the demand side
and inexact relationships between supply, consumption and price,
this exercise does not produce a precise answer but can provide
some guidance for producers in making pricing decisions."
Good's comments came as he reviewed the corn and soybean
markets, where the most important factor for the next six to
eight weeks is the potential size of the 2006 crops. Current
conditions raise concerns about potential yield.
The USDA calculates the 2006 trend yield for corn at 149
bushels. A yield at that level would produce a crop of about
10.74 billion bushels. Consumption of U.S. corn is expected to
grow from 11.175 billion bushels this year to 11.735 billion
next year, leaving Sept. 1, 2007, inventories at 1.077 billion
bushels, or 9.2 percent of expected consumption.
"Based on the relationship between the year-ending
stocks-to-use ratio and marketing year average farm price since
1998-99, that scenario would be expected to produce a 2006-07
marketing year average price near $2.45," said Good. "The USDA
projects the average in a range of $2.25 to $2.65."
At the close of trade on July 14, corn futures prices for the
2006-07 marketing year reflected a price well above $2.45.
December 2006 futures settled at $2.7675, with deferred
contracts at progressively higher prices. September 2007 futures
settled at $3.08.
"Assuming that the historic relationship between futures
prices and the average monthly cash price received by farmers
holds for the year ahead, and that producer sales are
distributed in a typical fashion, the market says the average
farm price will be near $2.75 during the 2006-07 marketing year.
"An average price of $2.75 implies a year-ending
stocks-to-use ratio of 7.2 percent -- 845 million bushels --
which implies a crop of 10.508 billion bushels, assuming use of
11.735 billion bushels. A crop of that size implies a yield of
145.9 bushels per acre, 3.1 bushels below trend."
Based on the historic relationship (1986 through 2005)
between the U.S. average yield and the percent of the crop rated
good or excellent at the end of the growing season, a yield of
145.9 bushels would require that the percent of the crop rated
good or excellent drop from 63 percent on July 9 to 57 percent
by the end of the season.
[to top of second column]
"In the past seven years, however, the U.S. average corn yield has
been higher than suggested by crop ratings," said Good. "A year-end
rating of 57 percent good or excellent last year, for example,
resulted in an average yield of 147.9 bushels. Allowing for a
continued increase in trend yields, a crop rating of 53 percent good
or excellent at the end of the current season might translate into
an average yield of 145.9 bushels."
For soybeans, the USDA
calculates the 2006 trend yield at 40.7 bushels. A yield at that
level would produce a crop near 3.01 billion bushels. The USDA
projects that consumption of U.S. soybeans will increase from 2.802
billion bushels this year to 2.998 billion bushels in the 2006-07
marketing year, leaving Sept. 1, 2007, inventories at 560 million
bushels, or 18.7 percent of projected use.
"The historic relationship between the year-ending stocks-to-use
ratio and the marketing year average farm price suggests that this
scenario would result in a 2006-07 average farm price of $5.45,"
said Good. "The USDA projects the average price in a range of $5 to
"For the current year, the average price will be about 25 cents
higher than projected by the stocks-to-use ratio. If that 'premium'
continues next year, an average price near $5.70 might be expected
with a trend yield."
At the close of trade on July 14, soybean futures prices for the
2006-07 marketing year reflected a 2006-07 marketing year average
farm price well above $5.65. November 2006 futures settled at $6.25,
and August 2007 futures settled at $6.60.
"That price structure translates into an average marketing year
farm price near $6.20," said Good. "That price implies a year-ending
stocks-to-use ratio of 11.33 percent -- 340 million bushels -- and
an average yield of 37.7 bushels, three bushels below trend value.
"Again, based on the historic relationship between crop condition
ratings at the end of the season and the U.S. average yield, a yield
of 37.7 bushels would require that the percent of the crop rated
good or excellent decline from 58 percent on July 9 to 36 percent by
the end of the growing season."
Good added that his analysis assumes that the USDA has correctly
forecast corn and soybean consumption and that historic
relationships between stocks and price and crop conditions and yield
prevail during the year ahead.
"Based on that analysis, the market is apparently anticipating
further significant reductions in crop condition ratings," said
of Illinois College of Agricultural, Consumer and Environmental
Sciences news release]