Todd's Take

Corn's WASDE Warning

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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Heading into the August WASDE report of 2011, there was reason to expect higher corn prices as USDA's 2011 crop ratings were similar to those we see today. Prices actually fell lower by the end of November, pressured by a bearish surprise in the Sept. 30 corn stocks report and corn's bearish seasonal tendencies related to harvest. (Source: DTN ProphetX)

So far in 2017, this year's corn crop has been assessed by USDA's weekly ratings of crop conditions, and while they give us a rough idea of how crops are doing around the country, they will never be mistaken for accurate yield data.

The perennial game of guessing yields takes its next step Thursday when USDA releases its first yield estimate based on field data in its 11 a.m. CDT World Agricultural Supply and Demand Estimates (WASDE) report. According to last year's report, USDA's August estimate of U.S. corn production has a 90% confidence interval of plus or minus 12%. So the estimate is still rough, but the more important thing is that it will set a tone for crop expectations heading toward harvest.

If we play the popular game of comparing this year's crop ratings to previous years, a recent year that comes closest to 2017 is 2011. For the record, 2011-12 finished with a national corn yield of 146.8 bushels per acre, or 5% below trend. A roughly equivalent result in 2017 would come to 163 bpa, but don't start placing bets yet.

Looking at the bigger picture, comparing corn prices in 2011 to 2017 is a bad idea as the two market environments could not be more different: 2011 was in the midst of a golden era for corn prices, boosted by new national mandates for increased ethanol production.

On the other hand, 2017 corn prices are among their lowest levels in seven years with the highest level of old-crop carry relative to annual use in 11 years, thanks largely to four consecutive years of good weather. As different as these two Mutt-and-Jeff years are, there is one valuable lesson that we can still learn from 2011 that serves as a warning to today's corn prices.

Going back to 2011, we see that the August WASDE report gave corn bulls reason to cheer as USDA's yield estimate was reduced from 158.7 to 153.0 bpa and harvested acres were trimmed by a half million. December corn jumped 25 1/2 cents that day, celebrating the acknowledgement of problems that USDA's lower crop ratings had been pointing to before the WASDE report.

The September WASDE report in 2011 was even more bullish, taking the yield estimate down from 153.0 to 148.1 bpa. USDA's estimate of U.S. ending corn stocks, which was 870 million bushels before the August report, was now down to a slimmer 672 mb. December corn rallied 9 cents on September's report day, but as you might have guessed, there is more to the story.

As bullish as those two USDA reports were, preceded by crop ratings which were very close to the ones we see today, December corn did not go on to trade higher in 2011. As it turned out, December corn peaked on Aug. 29 at $7.79 a bushel, a little over two weeks after the August WASDE report. From there, it was all downhill, and by the end of November, prices were down to $6.01 1/4, a quick 23% drop from the peak.

What happened to the bullish hopes of 2011? From today's perspective, we shed no tears as $6 a bushel is still a fantastic price, but the bullish exuberance of 2011 gave way to the reality of harvest pressure just as corn prices do most years. Prices also got a 40-cent shove lower on Sept. 30 when USDA's report of Sept. 1 corn stocks came in 208 mb higher than expected. That slim 672-mb estimate of new-crop ending stocks in September was bumped up to 876 mb in October's WASDE report.

As we head to Thursday's WASDE report, it is easy to expect USDA will lower its yield estimate and its estimate of 2017 corn production. It is also not hard to imagine corn prices trading higher on the news, showing some celebration of USDA's acknowledgement of problems.

We may even see another reduction in September as happened in 2011. But excuse me for being skeptical of any bullish celebrations in December 2017 corn. As 2011 reminds us, even this year's crop problems offer no immunity from corn's bearish seasonal tendency as we get closer to harvest.

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Todd Hultman