Todd's Take
Corn and Soybean Prices Assert Their Own Market Opinions
It is the morning of Aug. 25 and as I put the finishing touches on this week's Todd's Take, we are in the heart of the U.S. corn and soybean crop-guessing season. If you recall, DTN's Digital Yield tour started things off on Aug. 7 with a highly detailed yield estimate from Gro Intelligence of 177.0 bushels per acre for corn and 51.0 bushels per acre for soybeans. Using USDA's harvested acre estimates at the time, it put the corn crop estimate at 15.275 billion bushels (bb) and the soybean crop estimate at 4.218 bb.
USDA's Aug. 12 estimates, which include results from roughly 14,700 farmer operator surveys, estimated the 2023 corn crop at 15.111 bb, based on an average yield of 175.1 bushels per acre. The soybean crop was estimated at 4.205 bb, based on a yield of 50.9 bushels per acre.
The latter half of August, however, has been downright nasty for row crop conditions, baking crops in hot and dry weather at a time when corn is normally putting on test weight and soybean pods should be filling. The extreme heat that took temperatures to triple digits as far north as southern Wisconsin Thursday is expected to retreat to more moderate levels the next several days, but if forecasts are correct, rain will remain scarce the next two weeks. The 2023 crop that experienced unusually early stress shortly after it was planted, was revived by above-normal rains in July and early August, only to succumb to another round of harsh conditions near the end of the season. The lack of good comparisons to the 2023 season is making this year's estimating process even more difficult than usual.
One of the famous tidbits of advice from famed investor, Charlie Munger, when facing a difficult problem is to "Invert, always invert" (https://www.youtube.com/…). In other words, turn the problem backwards. In this case, I wondered, instead of trying to guess what prices will be from our attempts to estimate crop size, let's use the history of market prices to tell us the crop size the market is expecting. At DTN, I already have a fundamental model, based on 25 years of cash price data for corn and soybeans relative to their costs of production and USDA's corresponding ending stocks-to-use ratios.
Statistically speaking, the coefficient of determination for the corn model is 55% and 49% for the soybean model. In other words, USDA's ending stocks-to-use ratios explain roughly half of the moves in corn and soybean prices. That's far from 100%, but about as good as you'll find for a marketplace comprised of fallible, emotional human beings.
On Thursday, Aug. 24, DTN's national index of cash corn prices closed at $5.03, just below USDA's $5.07 cost of production estimate for 2023-24. Plugged into corn's correlation history, the current price is estimating an ending stocks-use-ratio of 12.6% or roughly 1.8 bb of ending corn stocks, significantly lower than USDA's 2.202 bb estimate and lower than recent crop estimates would suggest.
For soybeans, Aug. 24's close of $13.65 is 12% above USDA's estimated cost of production in 2023-24 and suggests ending soybean stocks-to-use ratio of 7.9% or roughly 335 million bushels (mb) of ending soybean stocks in 2023-24. USDA's current ending soybean stocks estimate is 245 mb, a tighter scenario than the market is now trading.
Now that we have a collection of crop estimates from USDA, various private sources and the market's own opinion, what do we actually have, besides a lot of uncertainty? We can analyze all we want, but math only goes so far. Until crops reach maturity and we can see significant sample sizes of actual field data, we are wobbling on a rocking ship, throwing darts at a moving target.
Crops won't be completely mature by the first week of September when surveys are gathered, but the September World Agricultural Supply and Demand Estimates (WASDE) report will have the kind of large sampling of field data needed to narrow down this year's options. I find the market-based estimates above interesting, not because I believe they have special predictive powers, but because they offer a simple proposition: Do we want the under or the over?
For new-crop corn supplies, I suspect the over is still the way to go. Even with this year's poor finish, 94.1 million acres of corn plantings are hard to get past. For soybeans, the under seems like an easy bet with every hot, dry day taking new-crop supplies away from an already tight new-crop scenario. As risk managers, producers don't get a prize for winning the yield-guessing game. The important trick is to determine which crop has the better chance of being profitable in the months ahead and let that be the crop you store. This year, that game looks pretty clear-cut.
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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.
Join us at the DTN Booth, Lot 360, at the Farm Progress show in Decatur, Ill., where DTN Meteorologist John Baranick and Lead Analyst Todd Hultman will be talking about weather and the outlook for corn and soybean prices at 10 a.m. CDT and 2 p.m. on Aug. 29-30, and again at 10 a.m. on Aug. 31.
Todd Hultman can be reached at Todd.Hultman@dtn.com
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