Inside the Market

On July 12, 2023, USDA estimated a record-high 15.32-billion-bushel (bb) corn crop, and traders responded by selling December corn down 17 3/4 cents to a new 2023 low of $4.83 3/4. Had they done their homework, they may not have acted so hastily.

When it comes to estimating the size of the corn or soybean crop in any given year, there is a progression of information that happens over time as crops develop. The 181.5-bushel-per-acre yield in USDA's corn-crop estimate in May, for example, is based on a historical trend that assumes normal planting conditions and normal weather. It reflects the past and offers nothing unique about the 2023 crop. It should be no surprise that USDA's 42 years' worth of U.S. corn-production estimates in May show a 90% confidence interval of plus or minus 24.3%, a level of uncertainty so wide it has no practical predictive value.

The yield estimate in the July World Agricultural Supply and Demand Estimates (WASDE) report is not much better. It's also based largely on past trends with the added comment, "but lowered to reflect extreme dryness in June." July's 90% confidence interval of 17.9% means that USDA's 15.32-billion-bushel production estimate should be interpreted as something between 12.6 bb and 18.1 bb. Traders ignored the uncertainty of USDA's estimates at their own peril.

Production estimates in the WASDE report get a little more accurate with each passing month. The 90% confidence interval for corn drops to plus or minus 7.3% in September as USDA adds field observations and is down to 3.6% by November, when many are either finishing harvest or are getting close to being done.

The trick, of course, is that the market is also making its own crop estimates in between WASDE reports, adding anecdotal reports from around the country, comments from crop tours and an elaborate network of ag gossip. As USDA's expected ranges of crop estimates narrow over time, so does the volatility of corn prices. Measured by the range of two standard deviations divided by the price's monthly average over the past 10 years, one-month volatility averaged 6.8% in July, 4.0% in September and 3.3% in November.

In other words, by the time we get to September and October, the price of corn has already largely settled in on a narrower price range that it considers reflective of the market even before we get USDA's more historically accurate estimate in November.

As I write this in mid-July 2023, we are still at the highly uncertain end of the crop timeline and have much to learn. The threat of this year's widespread drought is real, but we have also seen several areas of crops revived by beneficial rains. So far, December corn is holding support above $4.90, but Brazil is on track for record production. This is no time to be overconfident about what lies ahead.

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