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Market Commentary for 8/9/23

Jon Scheve with weekly market commentary made on August, 8 2023

Last month the USDA lowered their yield predictions due to extreme dry conditions in May and June. Now everyone will be watching this Friday’s August WASDE report to see if the yield estimate is changed again and by how much. Since so much is riding on what the national yield will be, most traders are trying to predict what it will eventually be using several different tools. The following are just a few: Weekly Crop Condition Reports Some market participants monitoring the USDA’s weekly crop condition reports say that overall conditions are worse this year versus last year, which suggests the 177.5 July estimate from the USDA is too high. But in this week’s report corn conditions are now only 1% lower than last year. The problem with weekly crop condition reports is that they are subjective and based on someone’s opinion of how the crop is progressing. This makes it very difficult to compare conditions from year to year for any particular week. If the crop is ahead or behind normal growth for any week, comparisons can be unreliable. This week’s report shows that the corn crop is almost 5% ahead of last year. Plus, there is high turnover rate among those providing reporting each year, which adds more inconsistencies. Additionally, weekly crop ratings and the final yields have not historically correlated much. That’s why the best use of these reports seems to be just loosely comparing crop conditions in the surveys from the first report of the year and watching the overall direction of the ratings trend. The Drought Monitor Some market participants think the drought monitor showing 55-65% of the corn belt in some stage of a drought during the growing season will mean substantially lower yields. However, it is important to remember that the drought monitor focuses on long-term issues and corn can survive in a “long-term” dry weather pattern, as long as there are still timely rains. Looking at July 2023 weather throughout the corn belt, rain has been extremely timely in many areas. For example, at our farm in Southeast Nebraska the corn looked very stressed in late June. However, after small weekly rains throughout July, our corn crop is fortunately thriving, despite the high heat the past two week. Plus, high summer humidity has helped limit yield deterioration in many areas. Also, when I compared the corn on my drives from Minneapolis, MN to south of Lincoln, NE in the middle of June and then again in late July, the corn looks much better now overall. Last year when I made the same drive during late July, there were drought conditions in eastern Nebraska, and those areas look much better this year. But again, this is all subjective based on my perspective and not easy to measure. Another farmer may think differently than me on the same drive. High-Tech Monitoring Each year more market participants are using advanced technology to try and predict crop yields. For example, they are using new computer models with satellite imagery and historical references that include vegetative health indications and weather patterns. From what I understand, these satellite images of every field in the US can better quantify crop performance than people driving down the road or random ear checks from walking through fields. However, there are limitations. Right now, the forecast accuracy before August 1st is only about 50%. After this date, the accuracy rates increase about 2-3% each day until mid-August. From then until mid-September the accuracy rate increases more slowly until reaching about 90%. They still are not perfect, but they seem to be getting better. This seems to make sense because dry weather in late summer can limit kernel fill and test weight, both of which impact final yield. That is why most computer models also incorporate weather forecasts in equations to improve accuracy. Despite improvements though, they are still limited because weather forecasts beyond 5 days are still unreliable. The computer models I subscribe to tell a much different story than the subjective reports in the trade. They are showing a high probability that the national corn yield will not be lower than the USDA’s July estimate, and there is a strong possibility the yield could actually be higher. Social Media Social media is flooded with pictures of poor looking crops and comments about how widespread the issues are. There are several problems with this. One, few producers share their location when posting, which makes it hard to know where the problems are or how widespread the issues might be. Two, those with crops doing well seldom post for a variety of reason, so the bad conditions can often be very over-stated. For example, I recently saw a post from a farmer 40 miles from my farm who said the destruction of the crops was “widespread” in his area. Admittedly, the fields near his immediate location did not look very good, but the fields near my farm looked much better than his. So, was the destruction really “widespread” if it didn’t reach 40 miles away? The term "widespread" is used often but can also be subjective. Does it mean 25 miles? 50 miles? Or maybe 100 miles? For reference:

  • 25-mile radius = just over 1 million acres or .5% of the entire corn and soybean belt

  • 50-mile radius = just over 5 million acres or 3% of the entire corn and soybean belt

  • 100-mile radius = just over 20 million acres or 11% of the entire corn and soybean belt

For perspective, over the last two years flash droughts in July and August have negatively impacted yields of at least 25% of the corn belt. However, the national yield has stayed in the mid-170’s both years. After many conversations with producers throughout the US this year, I do not get a sense the scale of drought destruction is as big, or even the same type, as the last two years. It seems the rains in July have really helped out most of the crop. That being said, I know some areas have not received any rain and the corn has been zeroed out. I think this will amount to approximately 1 million fewer harvested acres this fall, which would match the average harvested acre percentage of the last five years. Another thought, without those acres, it could lead to the average yield increasing. Bottomline: Weather certainly was dry in June, but historically the corn crop is not made or lost in June. And while there are definitely areas that have been hit hard with dry weather, those areas seem to encompass a smaller percentage of the corn belt than the last two years. Additionally, high temperatures during corn pollination were largely avoided, and rain has been timely throughout most of the Midwest in July. So, there is still a chance the corn yield could climb higher, and not go lower. The market does not likely have a 177-yield priced in yet. However, even if the USDA does not change the yield in the upcoming report, it could still be bearish for corn. And even if there are fewer harvested acres, there will still be about 2 billion bushels of carryout next year if demand does not increase, which is also not bullish in the short-term. Imagine what the price would do if yields would get bigger.

Jon Scheve Superior Feed Ingredients, LLC

9358 Oak Ave Waconia, MN 55387

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