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CME: Market Comments

by 5m Editor
13 August 2008, at 12:30am

US - CME's Daily Livestock Report for 12th August 2008.

The USDA August crop and livestock supply estimates are in and, despite supply projections that were on the high side of market expectations, corn futures actually closed higher on the day. Overall, the report confirmed what the market had been expecting and trading since early July, i.e. corn yields and overall output this year is not going to collapse and lead to severe rationing as previously feared.

After re-surveying farms in areas affected by floods in early June, USDA increased its harvested acres estimate by 400,000 acres, adding about 62 million bushels to expected production. The USDA August corn yield estimate was pegged at 155 bushels per acre, higher than the 152 bu./acre average trade estimate prior to the report’s release.

In the attached table, we sought to compare USDA’s August corn yield estimates with final yields. As you can see, using crop conditions and August yield estimates to predict final yields provides mixed results. While in general one would expect a strong correlation between better than average crop conditions and higher final yields, that is not always the case.

Mother nature throws a curveball once in a while and what may appear as a great crop in early August can still be negatively impacted going into the fall. In two of the eight years when crop condition ratings were above the 18 year average, final yields actually were lower than the USDA August estimate. However, in three of those years, crop yields surged by more than 7% from August estimates.

Only 30% of the current crop is in the doughing stage, well behind last year’s and the five year average pace. But being behind does not necessarily lead to a deterioration in yields. In 1992, the corn crop was at about the same stage as in 2008, which likely caused USDA to be more conservative in its yield estimates despite excellent crop conditions. The final yield, however, did not suffer from being behind schedule and final USDA yields were 8.4% higher than the August USDA estimate.

On the other hand, one can point to what happened in 1995 and 2000, when good crop conditions did not necessarily lead to great yields. Bottom line is that there is plenty of time left to make any final determinations about the current corn crop. For the moment, the market appears to have traded much of the expected improvement in crop conditions. However, it is likely that we will continue to see corn trading to continue to focus on supply issues and not really begin to account for demand factors until after the current harvest is completed.

5m Editor