Todd's Take

As scouts hit the road for this year's Pro Farmer Midwest Crop Tour, everyone wants to know what they will find and, more specifically, whether or not they will agree with USDA's national corn yield estimate of 175.1 bushels per acre. With as much effort and discussion as we put into estimating the 2016 crops, I had to pause and wonder about the wisdom of the whole approach. Beyond understanding that the U.S. is going to harvest a lot of corn this fall, does it really matter if the yield is 173 bpa or 175? I doubt it.

On one hand, USDA test plots and private crop tours make sense. We can sit in an office all summer with weather maps and make guesses, but that will never be a good substitute for getting out in the fields and taking a good look.

On the other hand, even USDA's methodical field observations are only so accurate. According to USDA's August 2016 Crop Production Report, the Aug. 1 corn production estimate has a 90% confidence interval of plus or minus 6.5%. This means USDA's 15.153 billion bushel estimate is likely to end up somewhere between 14.2 billion and 16.1 billion bushels.

The whole reason we try to predict the size of the corn crop in the first place is to try to understand prices, but prices appear to have already anticipated most -- if not all -- of this year's big crop. Instead of wondering if a big crop will get bigger, the better question is: Will this year's low corn prices get lower?

Going back to 1999-00, I was able to find seven similar seasons to 2016 when final corn production was larger than USDA's original crop estimate in late February. I then wanted to see how Dec corn prices performed from the end of August to the end of November. Did low corn prices get lower as more harvest information became available?

On average, no. In these years of bigger-than-expected harvests, Dec corn traded slightly higher on average from the end of August to the end of November and also finished higher in four of the seven seasons. The biggest drop was 19% in 2004-05 and the biggest gain was 22% in 2009-10. So yes, Dec corn could go either way from the current level, but the notion that there is a tendency for August's prices to get lower (implied in the saying, "big crops get bigger") is not supported by the data.

Instead of getting carried away with the latest crop estimates, I suggest keeping a focus on the market's own clues and the relation of corn prices to their cost of production -- a method that I re-visit at the start of each year.

In 2016, the likely range for Dec corn based on production cost was $2.95 to $4.42 a bushel. Because corn's demand environment is better in the U.S. this year than it was in 2015 when Brazil's real was cheap, I don't expect Dec corn to reach $2.95, but prices in the low $3s are reasonable, considering the good weather that most of the Corn Belt has enjoyed.

The other clue that corn prices are getting close to support came from Friday's Commitment of Traders report. CFTC data showed that commercials were net long in corn for the third consecutive week, holding 43,478 contracts as of Aug. 16. Commercial buying in response to low prices is a good sign that corn's value is appreciating -- even as a record crop is anticipated.

USDA's crop estimate may or may not increase in the days ahead, but we would be wise not to become overly-influenced by those numbers. As far as corn prices go, it seems likely that the bulk of this year's big crop has already been accounted for.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman1

(CZ)

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