Todd's Take

The mind is a funny thing. I'll admit, mine can be stranger than most as I've been known to wake up at 2 a.m. and get ready for work before I realize I'm a few hours early. I mention that disorientation because it is a lot like how I felt Nov. 9 when USDA, in its World Supply and Demand Estimates Report, predicted a new record high corn yield of 175.4 bushels per acre.

What -- 175.4 bpa? With drought in the Dakotas, spread into Iowa? With deep cracks in the soil in central Nebraska and farmers in central Illinois telling us how dry it is? After crops in Indiana and Ohio were under water this spring? Is a record yield possible? Did USDA key in a wrong number?

Possibly like many of you, my thoughts raced, trying to remember all the details of the year. We have long known that USDA's crop ratings in weekly Crop Progress reports don't correlate well to eventual yields, but even so, USDA's report at the end of October rated 11% of the corn crop as poor or very poor, up from 7% a year ago -- not what we would expect for a year with a record yield.

A more disturbing segment of USDA's Crop Progress report was the table of subsoil moisture conditions. In early June, subsoil moisture around the Midwest looked good to start the season, but dropped significantly in the northwestern Plains by early July and dropped in the central Midwest by the end of July. One month later, even 48% of Illinois was reported to be either short or very short of subsoil moisture.

A snapshot reading of USDA's map of subsoil moisture at the end of July showed seven of the top eight corn-producing states significantly drier than a year ago. Half of the top state of Iowa was reported as short or very short, up from 14% in 2016.

USDA's Crop Progress reports weren't the only sources of confusion. The University of Nebraska's Drought Monitor, as of Aug. 1, showed six of the eight top-corn producing states significantly drier than a year ago. Drought in the Dakotas was well known, but even Iowa showed areas of moderate to severe drought that weren't present a year ago.

Yet if USDA is correct (and they may not be), Iowa will harvest 197 bpa in 2017, down from last year's 203. Illinois' 198 and Nebraska's 179 bpa will both exceed last year's totals by 1 bpa. The irony in all this is that Minnesota enjoyed relatively good growing weather in 2017, but has an estimated corn yield 3 bpa lower than last year's 193 bpa.

While reaching for the aspirin bottle, how are we supposed to reconcile the conflicting images of increased drought around the Corn Belt with USDA's new record yield? Was this year's drought fake news? No, not likely.

Is USDA's November yield estimate of 175.4 bpa a bunch of hooey? Maybe. Based on the past 35 years, USDA's 90% confidence interval for U.S. corn production in November is plus or minus 2.3%, which works out to roughly plus or minus 4 bushels of yield. The yield in January's WASDE report could still drop back down below last year's 174.6 bpa.

Barring some undiscovered malfunction, the most likely explanation for this year's higher corn estimate is simply that yes, the weather had more challenges in 2017 and even so, today's corn seed is so good that it produced higher-than-expected yields anyway. It seems that genetic science has produced Super Corn.

This will sound like heresy to some, but as surprising as USDA's yield estimate was, nothing about Thursday's WASDE report significantly changed the expectations for corn prices. Commercials had been showing interest in the long side of corn since late September and noncommercials were already net short (bearish). If noncommercials go too heavy on the short side of corn, they risk getting trapped in a short-covering rally.

This is still the time of year when seasonal lows are typically made in corn, and although supplies are plentiful, it is still reasonable to expect some improvement in cash corn prices once this harvest gets put away. No, this is not a bullish market environment for corn prices, but it wasn't last Wednesday either.

Now, where did I put that aspirin?

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

Follow Todd Hultman on Twitter @ToddHultman1

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