Different method led to shocking cut to U.S. corn forecast

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Don't consider the 1.3 percent drop in the U.S. Department of Agriculture's corn harvest forecast a cut.

That was the message from Lance Honig, chief of the crops branch of the USDA's National Agricultural Statistics Service, after the department sparked a rally in corn futures with a surprising reduction in its monthly outlook for the U.S. harvest.

The decline does not necessarily imply that the corn crop has deteriorated from last month, because the USDA used different procedures for estimating the size of the harvest, he said.

"I don't know that there's necessarily a comparison between last month's yield and this month's yield," Honig said. "It's really apples and oranges."

The USDA forecast that farmers will harvest 154.4 bushels of corn per acre this year, down from its July forecast of 156.5 bushels.

The change sent corn futures to their highest level in more than a week and fueled debate among farmers, traders and fund managers about what was wrong with the crop. They are highly sensitive to changes in the harvest outlook after a devastating drought slashed U.S. output last year.

Analysts on average were expecting the USDA to raise its yield estimate to 157.7 bushels due to favorable crop weather, according to a Reuters poll.

December corn, which represents the crop that will be harvested this autumn, ended up 10-3/4 cents at $4.64 a bushel at the Chicago Board of Trade.

The procedures for judging the crop size were different because August is the first month that USDA surveys farmers and physically checks fields to determine its estimates. In previous months, it relies on statistical formulas because the crop has not sufficiently developed.

From July 24 to Aug. 6, the USDA interviewed more than 24,000 producers about their yield expectations as of Aug. 1. The government will continue to survey the growers throughout the autumn to provide updated reports.

"From now to the end of the season, we'll use the same procedure month after month," Honig said. "It probably becomes a lot more valid to make those comparisons month to month."

Shock over the USDA's reduced yield estimate fueled wide-ranging theories above why the government had made a cut. Some analysts hypothesized that USDA was factoring in the risk for a frost to hurt the harvest, while others said that USDA employees had found fewer corn stalks in fields than expected.

The condition of the crop is more uncertain than normal this year because it was planted later than usual in the spring, delaying development.

Food companies and ethanol producers are betting a bumper harvest will replenish corn supplies, which are expected to drop to a 17-year low by the end of the month.

"When the number hit the screen this morning, I was shocked," Peter Meyer, senior director for PIRA Energy, said about the reduced corn yield.

Deutsche Bank, in a note, agreed the change was a "shocker" and reviewed USDA comments about weather to find an explanation. The bank kept its harvest forecast unchanged at 160.8 bushels an acre, despite the USDA's adjustment.

Arlan Suderman, senior market analyst for Water Street Solutions, said he too was expecting a bigger crop than the USDA projected. He pegged the yield at 158 bushels per acre and said he would continue to digest USDA's latest survey-based outlook.

"This is the starting point," he said on Monday about the USDA's report. "I still put this one with a little bit of an asterisk beside it, because the crop was so immature when they were out there."


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