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Trend Line Yields Still Possible, Given Drought?

Monday, August 28, 2017
filed under: Marketing/Risk Management

The 2017 growing season certainly has been an interesting one across the U.S. and Canada. It offered the first significant weather stress on crops in four or five years. The season started cool and wet across most of the Corn Belt and Northern Plains, but the rains stopped in June and temperatures were warm to hot through July.
The U.S. Northern Plains and southern Saskatchewan in Canada became enveloped in a full-fledged drought. Drought-like conditions also covered much of Nebraska, Kansas and Iowa. The weekly drought monitor map (below) clearly shows how severe the drought had become by the middle of August.

       The spring wheat crop was the most severely hurt because the drought was centered in the central and western Dakotas and eastern Montana. The USDA pegged U.S. spring wheat production at 364 million bushels in their August report. That compares to nearly 500 million bushels in 2016. Canada’s all-wheat production was estimated at 26.5 million metric tons. That is down from 31.7 MMT in 2016. Durum wheat production will also be down 50% from 2016.
       The huge question for all of these markets is: Can we produce trend line yields (or even close to trend line yields) with so much of the major production areas affected by varying degrees of drought and soil moisture shortages? The market has been betting that we can, with corn and soybeans still trading in the same ranges they were trading in last spring.
       The weekly USDA crop progress reports show that the good to excellent ratings for spring wheat, corn and soybeans are far below year-ago levels. Remember that U.S. corn, wheat and soybean yields set new records in 2016. zthe USDA started their supply/demand analysis for the 2017/18 marketing year using the second largest corn and soybean yield estimates in history. The table below shows the mid-August good to excellent ratings compared to a year ago.

Percent of Crops Rated Good to Excellent
(as of mid-August)

	2016	2017
Corn	74%	60%
Soybeans	72%	60%
Spring Wheat	68%	32%

The USDA’s August estimates were the first USDA corn and soybean production estimates of the season based on actual crop observations and producer surveys.

USDA July & August Supply/Demand Estimates
(in million bushels, except where noted)

	All Wheat July	All Wheat August	Corn July	Corn August	Soybeans July	Soybeans August
Planted (mil. ac.)	45.7	45.7	90.9	90.9	89.5	89.5
Harvested (mil. ac.)	38.1	38.1	83.5	83.5	88.7	88.7
Yield (bu./ac.)	46.2	45.6	170.7	169.5	48	49.4
Production	1,760	1,739	14,255	14,153	4,260	4,381
Carry In	1,184	1,184	2,370	2,370	410	370
Supply	3,084	3,074	16,675	16,573	4,695	4,777
Demand	2,146	2,141	14,350	14,300	4,235	4,301
Ending Stocks	938	933	2,325	2,273	460	475

       Obviously, there seems or be little or no correlation to declining crop ratings and dry weather and overall yields. The USDA actually raised the soybean yield from their July estimate and only reduced the corn yield slightly. The item that stood out in the August report was that no adjustments were made to the spring wheat harvested acreage estimate. There have been as many as 500,000 acres abandoned (hayed, etc.) that will eventually have to be accounted for.
The USDA will not estimate the U.S. sunflower yield until the October report. Smaller 2017 planted acreage and expectations for significantly smaller yields than the past two years will tighten up the sunflower balance sheet quite dramatically in 2017/18.
       World crop production will again be quite good in 2017, but not as big as last year. World wheat production will be slightly below last year, but production among the major wheat exporting countries will be down significantly — with the exception of Russia.
       The U.S. wheat crop will be down 570 million bushels, or nearly 26%, from last year. World corn production and world soybean production will also be below year-ago levels. The extent of the decline will depend on the final U.S. corn and soybean yields.
       The markets considered the August USDA reports bearish. It will take confirmation of lower yields in subsequent USDA reports to appreciably change this bearish outlook.

* Mike Krueger is owner of The Money Farm, a Fargo, N.D.-based grain marketing consulting firm. While the information in this article is believed to be reliable, marketing involves risk, and the author and The Sunflower assume no responsibility for its use.