August 14, 2013
Why we turned tail on the corn market
Has the USDA been outsmarted by its own corn yield methodology?
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
Many analysts were caught by surprise when the USDA cut its corn yield estimate from the earlier 156.5bushels/acre to 154.4bushels/acre. According to a Reuters poll, they were expecting an average yield of 157.7bushels/acre.
The most doubtful part of the low USDA corn yield estimate is its methodology: To calculate expected corn yields for any given year, it takes into account not just prevailing crop sowing or weather conditions, but also the average weight of corn ears over the previous five years.
Of course, anyone who follows the corn market knows that the years since 2008 have seen successive disappointing US corn harvests and unusually bad growing weather: When five years of anomalously bad weather are used to calculate the corn yield in a year of good growing weather, the chance for a miscalculation rise considerably.
This is also why, after years of saying the USDA is overestimating corn supplies, this time, we believe the USDA has underestimated the corn crop's size, and the market's bearish fundamentals.
That is also why, after an initially rising 3% to 4% on the day of the USDA report, within a day, CBOT corn gave up all its gains and was again back under US$4.50/bushel within a day. The wider market probably noted the bewilderment of observers such as Goldman Sachs and Deutsche Bank kept their corn yield estimates at 161bushels/acre or higher, which implied a 16 million tonnes more corn than the USDA had estimated.
Whereas the USDA estimates inventories rising from 18.2 million tonnes to 46.7 million, Goldman Sachs and Deutsche Bank yield projections imply closing inventories of nearly 63 million tonnes. At that point, unless South America plants considerably less corn or has incredibly bad growing weather, corn would have difficulty rising over US$4.50/bushel for at least one or more marketing years.
According to Deutsche Bank strategist Christina McGlone "For perspective, we estimate the corn market is incorporating a stocks-to-use ratio of about 15.5%, compared with the USDA's 14.5%, so we believe there is scepticism with respect to the USDA's yield estimate."
With the market treating the USDA's corn yield estimate as a very low, worst case scenario, corn's price has nowhere to go but down. From the way they are holding back from importing it, China's traders believe this to be the case too.
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