Forecasting the markets is a bit like forecasting the weather. Meteorologists know from historical experience the combination of air temperature changes and barometric pressures that it takes to create a severe storm. So when they see those conditions forming they issue the appropriate forecast.
The business of predicting commodity markets is similar. When we want to figure out how the market might behave, the trick is to look back over previous years to find a period with similarities and then use that historical model as a road map to where the market is headed.
We’ve known since June how many acres were seeded to each of the major crops for the 2020 production year: the biggest variable in terms of sorting out how big this year’s supply of corn and soybeans might be is yield.
Market modellers use the USDA’s weekly crop progress and condition reports in order to estimate yields for the crops as they grow in the field. What’s been really interesting about 2020’s weekly crop reports is that since the beginning of the growing season the results for both corn and soybean conditions have remained in a tight correlation to both 2017 and 2018. This years crop’s “good to excellent” ratings have been consistently 2 % to 3 % better than 2017, and 1 % to 2 % below 2018 on nearly every week since mid-June. With the crop condition ratings sitting pretty squarely locked between 2017 and 2018, it seems like a reasonable estimate to assume the 2020 average crop yields will fall in that range as well.
The average corn yield in the United States in 2017 was 176.6 bushels/acre, and for 2018 is was 176.4 bu/ac. They are two of the best average corn yields which the USDA has ever reported. The current projections for 2020 U.S. corn yield is 178.5 bu/ac, which is simply the 2017 and 2018 yields with a little added to reflect the trendline increase in corn yields over time. While I am fully prepared to admit that improvements in hybrids and new agronomic technology consistently raise corn yields, I wonder if we’ve improved enough over the last 2 or 3 years to increase yields by 2 bu/ac. But that’s what the USDA modellers have done. Corn yields typically increase by 1 bushel per acre per year, so with weekly crop conditions reporting similar to 2017 and 2018, they have simply taken the 2018 yield and added 2 bu (1 bu increase for each year), to formulate the estimate for this year’s crop. The bottom line is that if you’re wondering why corn futures prices have been reluctant to rally this summer, it’s because the potential size of the 2020 crop is likely to be the highest corn yield in history.
The average soybean yield reported by the USDA for 2017 was 49.3 bu/ac and for 2018 they reported an average yield of 50.6 bu/ac. The experience models provided by those two similar crop condition years give the markets good reason to anticipate 49.8 bu/ac average soybean yield projected by the USDA for 2020. It’s interesting that the government analysts didn’t slip in a trendline yield increase for soybeans in 2020 but in the case of soybeans the net impact on supply would at best be a detail. Similar to the situation in corn, weekly crop progress suggests that 2020 is on track to produce one of the highest-yielding soybean crops in history and as the season progresses there is less chance that unfortunate weather can derail the crop’s potential.
There are certain to be some small areas that have devastatingly poor yields this year. One of the real problems with the internet and social media is that if there is a flooded soybean field in one state, and drought-starved spiked corn in another, we’ve likely seen a picture of it on our phones. That’s not to suggest that these visuals aren’t real. They simply aren’t widespread. It’s as if you lived in a house in a city like Ottawa. If your house burned to the ground, it would be really horrible for you but the price of houses across the city wouldn’t suddenly spike because of a housing shortage due to the loss of one structure. There are some areas where crop yields will not turn out great in 2020 but the individual impact of those localized problems will not be enough to impact the continental supply.
Most of the downward pressure from a big harvest is already baked into today’s price. The good news is that we should have a lot more bushels to sell.
Steve Kell operates a crop farm in Simcoe County and is a former grain merchant for Parrish and Heimbecker Ltd.
