August 14, 2019
Official statistics vs reality: The USDA devastates corn prices amid enduring tight fundamentals, supply uncertainty
Strangely high yield and acreage estimates, dwindling liquidity, political crisis and trade wars exaggerate the deflationary impact of illusory corn abundance. Random weather changes can eaily slash harvest estimates back to previous levels. Will Autumn bring the market back to reality?
By Eric J. Brooks
An eFeedLink Hot Topic
Recording a far higher corn planted acreage than anyone thought possible, the USDA deflated world corn markets. Estimating 90 million of the 92.6 initially forecast corn acres as being planted, the resulting 353.1 million tonne corn estimate came in far higher than industry estimates, shocking buyers and speculators in equal measure.
Coinciding with other serious liquidity contracting factors, CBOT corn's price crashed 10% in two days. Upon hearing this shocking news, it fell its full 25cent/bushel daily limit, from US$4.18/bushel to US$3.93/bushel. This was its lowest price level and first time below US$4.00/bushel since early June, when the current period of inflationary price bias commenced.
Hong Kong's political crisis, the US-China trade war, a new Japan-Korea trade dispute and news of faltering world economic growth exerted considerable additional macroeconomic deflation on commodities. Hence it was not surprising that corn fell again the next trading day, closing near US$3.76/bushel. As was the case with July's WASDE report, many analysts doubt these estimates will stand at harvest time.
How shocking was the USDA estimate? The analyst community surveyed by Bloomberg was expecting 87.8 million acres planted and 164.9 bushels/acre yield, which would have translated into a 335 million tonne harvest. Needless to say, the 18 million tonne difference between expected and official estimates inflated inventory estimates had made market observers anticipate a sharp drop in stocks. Instead, the closing US corn inventory estimate was bumped upwards, from 51.1 million to 55.4 million tonnes.
Prior to the USDA report's release, Indigo Ag, a Memphis, Tennessee based firm that uses satellite technology to estimate acreage and crop yields estimated 85.4 million acres planted and a yield of 157.4 bushels/acre, implying a harvest of 341 million tonnes. It's not every day that USDA estimates come in so far above industry expectations and the shock could not have been greater.
--But these official USDA numbers contain odd implications. For example, when they are reconciled with prevented planting acres (due to earlier severe flooding), it implies that US corn farmers had initially intended to plant 101 million acres of corn this year. This would not only have been a record acreage but far higher than the 92.7 million acres the USDA itself had forecasted prior to this year's record breaking Springtime floods.
The implication that USDA numbers may require a revision of equally great magnitude in upcoming reports is clear. Moreover, there is even greater uncertainty with respect to crop yields than there is to planted acreage. If the USDA overestimated corn crop yields or an early frost disrupts growth, the harvest estimate can fall back into the lower end of our bullish estimate made on July 1st.
Cornered between disastrously delayed springtime planting, China's 25% import tax on soybeans and strong mid-year corn prices, American clearly farmers planted corn in June normally sown in April or mid-May.
They did so on two risky assumptions: First, that corn growing weather would show considerable improvement from mid-year onwards. Second, on the hope (and gamble) that frosty cold weather arrives late and extends this year's exceptionally short corn growing season.
From mid-June through mid-August, US Midwest weather was almost as ideal for crop growing to the same extent that it was dreadful during March, April, May and early June. Eight weeks of good weather prompted the USDA to boost its expected crop yield estimate to a surprisingly high 169.5 bushels/acre -significantly higher than the average 164.9 bushels/acre expected by Bloomberg surveyed analysts.
In a 13 August interview with Reuters Ceres Hedge Fund president Mark Kinoff expressed the following skepticism regarding official corn yield estimates: "The USDA is telling us this average, and you have to trade with the numbers you're given, but let's be realistic, these numbers are off." Similarly, in a note to clients, INTL FC Stone stated "USDA once again not cutting onto their estimates despite widespread expectations to do so," adding that "Foul cries will continue."
In an interview with Bloomberg, Jack Scoville, a broker at Chicago-based Price Group stated "We were out in central Illinois over the [August 10-11] weekend and the crop was silked and making ears, but only a couple of areas were far enough along to get a good count. The early area yields were good, the rest was blister or less and hard to count in any reliable way."
Scoville's ground-level observations tie in with Reuters stating that "analysts said USDA's corn numbers were still suspect, particularly the projected yield of 169.5 bushels per acre." This is because the USDA's unusually high yield estimate contains a built-in assumption that good crop growing weather will continue for as long as it is required
-In reality, during most growing seasons, USDA crop yield numbers "peak" in August and are then steadily revised downwards, especially if the weather becomes a factor in late Q3 or during harvest time -and this year's late-planted crop makes late summer/early Autumn weather a highly volatile wild card factor.
Alongside skepticism for such a late-planted crop to have such high yields, the other uncertainty is the six-week weather window between late August and early October. Corn is traditionally harvested during this time but late planting has shifted its harvest date by four to six weeks in many US Midwestern regions -thereby magnifying the risk posed to yields, harvest size and quality by the possible early onset of cold and/or rainy weather.
Partly due to the fact this year's corn yield estimate seems unusually high, partly due to the heightened risk of an early Autumn frosts damage, a 5% to 10% drop in yield estimates over the next two months is a highly plausible outcome: It would reduce the USDA harvest estimate from its current 353.1 million tonnes into the 318 to 335 million tonne range. -This is comparable to the bullish 322 to 341 million tonne harvest range we forecast on July 1st.
As a result of USDA revisions, world corn inventories (less China) increased by 4.4% or 4.8 million tonnes, from 107.1 million tonnes to 111.9 million -but even this leaves the 2019-20 closing stocks-to-use ratio at 13.1%.
On the other hand, a 5% to 10% reduction in the USDA's yield estimate will reduce inventories by 15 to 25 million tonnes. Instead of nearly 112 million tonnes, world corn inventories (less China) would close into the 87 to 97 million tonne range very similar to that forecasted in our July 1st article, with a relatively tight 10.2% to 11.5% world stocks-to-use ratio (excluding China).
On one hand, none of the above has to happen: The corn yield may really have rebounded to 169.5 bushels/acre. It is possible that the current spell of near-ideal crop-growing weather will extend into a warmer-than-average Autumn that allows corn to mature with little or no frost damage. Such a perfect ideal outcome is possible -but not likely-
In the real world, statistical outliers balance each other out over the long run. April and May's miserable corn-growing weather was followed by two nearly perfect months -but ideal growing weather doesn't last forever any more than bad weather does.
On one hand, based on market fundamentals, corn could bottom out near US$3.50/bushel and stay there for at least one quarter if the harvest really comes in at the USDA forecasted 353 million tonnes -though even this leads to a 13% (excluding China) stocks to use ratio, which is on the tight side. -On the other hand, over the next two months, the odds favor a weather event upsetting the previous two months of steady, unusually consistent growth, with the stocks-to-use ratio falling to 12% or lower.
Provided that the ongoing world macroeconomic slowdown and liquidity contraction don't get significantly worse, late Q3 and early Q4 favors a resurgence in corn prices. It is highly likely that some investors will remember mid-August 2019 as a missed buying opportunity.
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