CME: USDA crop report shares harsh reality

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click image to zoom In spite of generally cooler temperatures, it was another brutal week for U.S. crops with the probability of significantly short harvests becoming more and more likely. USDA’s weekly Crop Condition report contained little, if any, good news for grain and oilseed users as condition ratings continue to approach the all-time lows seen in 1988, the last widespread drought to high major U.S. growing areas.

Only 34 percent of U.S. soybean acres were rated in Good or Excellent condition as of Sunday. That figure is 6 percent lower than last week and a fully 30 percent lower than one year ago. It is also 31 percent lower than the 10-year average for week 28 which, this year, ended on July 15. The Good-Excellent percentage is still 14 percent higher than it was at a similar point in the 1988 growing season when hot, dry conditions pushed the Good/Excellent percentages as low as 19 percent in mid-August and never allowed a figure over 23% from August 1 onward.

The situation for corn is equally bad. Good/Excellent ratings for corn fell to 31 percent this week, down 9 percent from last week’s 40 percent. This week’s number compares to 55 percent one year ago and a 10-year average of 63.8 percent for this week. The Good/Excellent percentage for the week in 1988 was 18 percent. 38 percent of all corn acres are now rated as being in Poor or Very Poor condition. That compares to only 10 percent last year at this time.

About the only piece of good news that we could find was for spring wheat where 65 percent remained in Good or Excellent condition. That figure is only 1% lower than last week but is 8 percent below last year’s 73 percent Good/Excellent ratings at this time.

Is the corn market overheated based on the most recent information? That is a bit of a trick question. If one is going only on the most recent data from USDA, we think the answer is yes. The kicker of course is that the market may not be trading the most recent information from USDA—-even just one week after it was released.

We offer the chart at bottom right as evidence that the latter is very likely the case. USDA’s estimates for production and usage last week projected that 1.183 billion bushels would remain in bins at the end of the 2012-13 crop year. That is sharply lower than the June estimate but 31 percent larger than the current forecast for ending stocks this year. It also represents 9.3% of total corn usage for ‘12-’13. That compares to only 7.2% now forecast for ’11-’12 and 8.6% for ‘10-’11. As can be seen in the chart, a 9.3% year-end stocks-to-use ratio should, according to recent corn supply-price relationships, drive an average farm price of about $5.20/bushel, not the nearly $8 prices we are seeing now. Did corn demand grow that much? We don’t think so. What we do believe is that the market is trading a MUCH lower yield than the USDA’s prediction. In fact, it appears that the trade is now looking at a yield less than 140 bu./acre and a year-end stocks-to-use ratio of around 5% — the level believed by many to be the minimum possible.



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