Kub's Den

The cognitive dissonance of watching grain prices slide continually downward while the 2023 drought continues to beat down on the heart of the Corn Belt has been driving me crazy all summer! Has it been driving you crazy?

I look at the weekly crop progress condition ratings for corn and soybeans, which are both clearly the worst either crop has done in five years, and I think: "How can the market not be panicking about an upcoming shortage of grain?" In large parts of the country, this was not just a temporary blip, not just a flash drought in June with ambiguous effects on final yield -- but instead was an ongoing lack of moisture during all the crops' critical reproductive and grain-filling stages. We don't even have to look at this week's conditions as abstract numbers on a page, then wonder how it might affect final yield. We're already here at the end of the season; we've made it. We can walk out into the fields and know. It's not "risk" premium the markets should be pricing in. It's loss.

A common refrain from Iowa farmers this summer, as they've ventured into their fields and made yield estimates, is: "It's far better than I had any reason to hope." That's a testament to resilient genetics in today's seed. But it doesn't necessarily mean everything's okay. It could mean 3/4 of the hoped-for crop or perhaps half of a crop instead of zero crop.

So how can the reality best be communicated? Saying Iowa's corn has been rated at least 10% poor or very poor every week since mid-August, or saying only 51% of the United States corn crop is rated good or excellent at the end of the season isn't very persuasive without providing a sense of scale. I went back through the past ten years of data and found this is actually the worst crop of any of them. It's worse than last year at this point in the season (52% good or excellent), worse than 2019 (55% good or excellent), and far worse than the year with the No. 1 condition ratings, 2016 (74% good or excellent).

Ordinal rankings like this -- first, second, third, etc. -- are particularly useful for comparing quantities across the broad stretch of history, when over time the raw numbers may lose some of their context and meaning. A ranked list may not be as mathematically useful as a line chart, for instance, because it doesn't show the true distances between each data point. Even if 2023's corn condition ratings were much more dismal -- let's say only 25% good or excellent -- the year would still fall in the same rank on a list of the past ten years, and we wouldn't see how close or far away it was from the next, worse data point. However, this is perhaps closer to how our brains actually perceive things. The best. The worst. The third-best or the second-worst. And so on. It's simple to understand.

And this may be the trouble with the corn market right now. Despite relatively poor conditions for the drought-stricken crop, the official forecast from USDA is still expecting it to be The Biggest, The Best corn crop ever. We can quibble with the yield estimates that reflect high planting populations but not poor grain fill, or we could raise an eyebrow at the huge corn acreage figure, which apparently grew by 800,000 acres between August and September. Or we could even try to argue that 15.133 billion bushels (the current forecast for 2023 corn production) is less than 1% larger than the previous record-large September forecast (15.093 billion bushels in 2016). Doesn't matter. A trader in Chicago or Shanghai or Mexico City is still going to look at the ranked list and see the 2023 crop as the biggest September projection, ever. The 2016 crop's size grew, by the way, and made it to 15.148 billion bushels by the time it was all said and done.

The export sales prospects for the new marketing year sound terrible when expressed as a percentage of what was on the books at this time in 2021 (less than half), but not so bad when placed on a ranked list. Seventh out of 10 is basically the middle of the pack. Meanwhile, looking at historical prices from this point in the season during the past ten seasons is a great way to remind us how strong the market still remains. With the National Corn Index (an average of cash bids across the country) at $4.59 on Sept. 15, 2023, it's still the third best corn market we've seen in the past ten years. Many producers could be profitable at this price level, assuming they're among the ones who have the really amazing yields still expected by USDA. The next best mid-September price level for corn was $3.60 per bushel back in 2015. And if we really want to compare 2023 production to 2016 production, we should also consider the price of corn in the middle of September 2016 was only $2.90.

More reassuring than all that, however, is a belief that the markets will ultimately reflect supply and demand reality ... eventually. But first the market will have to find a way for the quantitative data to make it into traders' minds in a way that's easy to perceive.

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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.

Elaine Kub, CFA is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on X, formerly known as Twitter, @elainekub.

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