“Splitting the difference” is a common means of settling disputes. But it doesn’t always leave everybody happy. USDA’s latest forecast of 2023 U.S. corn production is a case in point.

Headed into the July 12 World Agricultural Supply And Demand Estimates, I noted the two extreme outcomes for model the agency uses to project corn yields before its first survey of farmers and their fields in August. This multiple regression analysis factors in July weather and May 15 planting progress in eight key states, weighted by acreage. It also includes a so-called “dummy variable” that is zero except when June precipitation falls in the bottom 10% of years historically.

Measuring rainfall across an entire state isn’t easy. Averages made by different satellite methods vary and coverage from individual weather stations can also be hit or miss, especially in a year like 2023, when storms inundated some areas and missed others. By some measures, June 2023 was in the bottom 10%, which would lower the yield to 173.5 bushels per acre. But estimates favored by USDA seemed to kick last month out of the bottom 10%, which would keep the yield at the 181.5 bpa figure used by the agency since its first forecast way back in November.

Balancing the dry June with the turn wetter already seen in July, USDA put the corn yield at 177.5 bpa, right in the middle of the two extremes. That was in line with the average market estimate before the report, but didn’t leave traders happy for sure. New crop corn futures on Thursday fell to $4.81, the lowest since March 2021, before finally reversing higher.

USDA’s lower yield offset the increase in acres from March intentions reported at the end of June. After adjustments to expected demand and leftover inventories on Sept. 1, the projection for 2023 crop marketing year ending stocks remained little changed at 2.262 billion bushels. That carryout amounts to a 57-day supply, nearly the highest since the ethanol boom began in 2006.

More corn normally means lower prices. USDA kept its forecast for 2023 average cash prices at $4.80, in line with futures contracts for 2023-2024 marketing year delivery. But if USDA’s record 15.320 billion bushel crop is confirmed, futures could ultimately test $4, a benchmark last visited in November 2020. So, unless the toll from the dry June on production potential was too big to overcome, prices in the rest of the summer and fall could have limited upside and more downside.

Soybean stagnation

USDA’s estimates for soybeans also disappointed the trade, but futures quickly appeared to recover follow a report-day downdraft.

The corn model weights variables using acreage from eight states: Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Ohio and South Dakota. The soybean version drops South Dakota and Kansas, which received above average rainfall in June, and substitutes Missouri, which was the most parched in the Midwest. That appeared to qualify 2023 as one of the driest 10% for soybeans, knocking several bushels off the projected yield.

Instead, USDA made no change, keeping its expectation for a “normal” yield at 52 bpa. Coupled with fewer acres found in the June 30 report, this cut 210 million bushels off the crop. Production was put at 4.3 billion, with expected 2023 crop carryout at 300 million bushels, around a 25-day supply at expected demand, up from the current marketing year but still modestly tight by historical standards. USDA raised its forecast for average cash prices to $12.40 as a result.

This suggests an average futures price for the crop of $13.15.

More importantly, it puts my projected selling range at $14.20 to $15.30, slightly above the July 3 high for November futures of $13.9175. July and August rainfall and temperatures are incorporated into the soybean yield model, so weather the rest of the summer likely will determine whether USDA’s “normal” yield is achievable. If not, prices could have more room to rally.

Weather report

Rainfall in the first days of July was above average overall in the key states for both corn and soybeans with temperatures below normal. Forecasts into the end of the month show a drying trend in the northwest part of the growing region with a little heat developing in most areas, though nothing extreme for the most part. Longer-term weather models point to above average temperatures in August, balanced by normal to above normal precipitation -- not especially damaging conditions for soybeans.

Supply isn’t the only variable up for grabs headed into the beginning of the 2023 crop marketing years for corn and soybeans. Demand is also in play.

USDA cut its estimate of 2022 crop soybean exports by 20 million bushels last week and expects that trend to continue next year as Argentine production rebounds from drought and Brazil continues relentless expansion amid stagnant demand from China. I’m a little more optimistic about sales, though crush could disappoint without a push from biofuel blending mandates. Overall soybean demand could be a little better than USDA predicts, but not enough to make a huge difference to prices.

USDA confirmed what I suggested last week for corn, increasing its forecast for feed demand, more than offsetting weaker exports and usage by ethanol plants. Ethanol demand could continue to disappoint, while improving livestock feeding next year could be difficult due to falling red meat and poultry production. Exports could turn out a little better than expected, though trade remains murky due to the war in Ukraine and uncertain weather around the world.

Feed production overseas could be hit by development of El Nino warming of the equatorial Pacific, which typically wreaks havoc in Australia. Adverse conditions already cut acreage in Canada and the EU, which could also give a boost to U.S. shipments abroad.

But markets remain supply driven, increasing the importance of yields. Without game-changing demand stimulants like the rise of corn ethanol and China’s appetite for soybeans, prices likely will rise or fall with weather forecasts and weekly USDA Crop Progress ratings.

A wild card could be the declining value of the U.S. dollar, which fell to 16-month lows last week after tame inflation readings convinced investors the Federal Reserve may soon end its relentless push to raise interest rates. Higher rates tend to boost the dollar, which also faced headwinds from ideas the rest of the world could begin to show better economic growth.

Cheaper dollars don’t make U.S. corn or soybeans less expensive than the competition because markets adjust quickly to arbitrage currency shifts. But a weaker greenback does tend to increase the value of dollar denominated commodities. That helped push crude oil above $77 a barrel last week and perhaps triggered a little of the late-week strength seen in the grain market too.

Knorr writes from Chicago, Ill. Email him at [email protected].

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.