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What’s behind USDA’s record yield predictions?

Getty/iStockphoto Grain truck unloading corn.
Apparently the drought wasn’t as bad as we thought.

USDA released new supply and demand numbers this week, and they were not the numbers you wanted to see if you were looking for higher prices.

With harvest a little less than halfway done, the USDA should have a good idea on the size of the crop we have out there. What’s not explicitly mentioned in the report? The summer heat and dryness issues did not affect the crop as much as many of us suspected.

In fact, USDA currently projects record state corn yields for Illinois, Indiana, Ohio, Michigan, Tennessee, Pennsylvania, New York, North Carolina, South Carolina and Oklahoma. The agency projected national corn yield at 176.5 bushels per acre, which is one-tenth bushels below the best crop ever of 176.6 produced in 2017.

As for soybeans, USDA is projecting record state yields for Indiana, Illinois, Ohio, Kentucky, New York and Pennsylvania. The national yield is projected at 51.5 bushels per acre, just shy of the all-time best yield of 51.9 in 2015.

USDA October 2021 corn yield map

USDA's October 2021 Soybean yield map

Increased carryout

The supply side of the S and D table wasn't the only bearish number the USDA released. The USDA increased the US and world carryout numbers to 1.500 billion bu. and 301 MMT (million metric tons) for the corn market, respectively. USDA chose to lower the feed and residual category by 50 million bushels and revised exports up by 25 million bushels.

We were surprised by the reduction in the feed/residual category as we anticipate feeding more corn in place of feeding high price wheat. USDA chose to leave the ethanol category alone this go-around. Still, we would expect ethanol demand for corn will increase in upcoming reports due to high energy prices. As for the 25 million bushel export increase, we are optimistic that there will be further upward revisions in this category down the line due to losses in Brazil earlier this year. Exports are currently projected at 2.5 billion bushels, down from last year's 2.753-billion-bushel export number.

China impacts markets

Our partners at John Stewart & Associates point out that China is projecting its corn crop at 271 million metric tons, not the 273 USDA currently assumes. If they are correct it could significantly impact world values. If China imports only 20 million metric tons of corn, as USDA anticipates, China ending stocks would fall from 206.2 to 203.2 instead of rising.

We would argue that China wants to keep building domestic stocks to keep food costs under control and keep feed values low enough to ensure feeding animals is a profitable endeavor. It makes little sense to raise corn stocks for one year and then let them fall the following year.

Due to tight wheat stocks, China could end up being the third or fourth-largest importer of wheat in the world this marketing year, so feeding high priced wheat instead of corn in feed rations seems unlikely. If these assumptions are correct, we would expect China to eventually buy close to 30 million metric tons this upcoming year, just as it did this past year.

Total soybean production for the new crop year is expected to be 4.448 billion bushels compared to 4.216 billion bushels last year. Ending stocks are expected to be 320 mb, up from last year's 256 mb ending stocks number. Domestic use is expected to be up 70 mb more than the previous year, led by a stronger crush, but exports are expected to be 175 million bushels below last year's 2.090 bb export program.

Due to the current export pace, this number looks high. Season-to-date exports are near 126 million bushels vs. 350 million bushels this time last year. If exports end up being cut by 200 million bushels, ending stocks could balloon to over 500 million bushels without any other adjustments. It may take until January to confirm if the cut to exports needs to happen.

Brazil’s market impact

In the near term we expect the market to keep some weather premium until we get a better handle on the size of that Brazilian crop. The Brazilians are off to a better start than a year ago, but with La Nina anticipated to develop, a record crop is not a sure thing. Looking at China's current recent purchases, we would expect China to be relatively aggressive buyers over the next two to three months; the question is will they buy enough to offset current slow purchase pace.

USDA continued the theme of tightening wheat supplies for the U.S. and globally. U.S. total wheat production was cut 50 Mb to 1.646 Bb, and world production was cut 4.4 Mt to 775.9 from the September report. The cut in U.S. production came from a 900,000 acre reduction in harvested acres and a two-tenths bpa cut to yield at 44.3 for total wheat. Most of the cuts came from HRW. US ending stocks were reduced to 580 Mb down from 615 Mb, in line with trade guesses. This ending stocks number is 265 Mb lower than last year in the U.S.

On the world production side, USDA cut 4.4 Mt from the previous report combined with the 4.2 Mt lower beginning stocks netting 8.6 Mt less supply.

Bullish on corn…

Looking at corn and wheat markets over the next few months, we have an optimistic tilt as we anticipate tight feed supplies will support both markets. Adding to the bullish view of corn is the fertilizer crisis that seems to worsen by the day. With fertilizer prices exploding higher (if you can find a company that will give you a bid), we anticipate we will plant fewer corn acres in 2022. Last time fertilizer prices climbed similarly (2007 into 2008), U.S. corn acres declined by 7.545 million, or 8%.  A similar percentage drop this year would equate to 85.78 million planted acres in 2022.

…on the other hand

We are pessimistic about soybeans as aforementioned lack of export demand has us concerned that USDA may cut soybean exports, increasing U.S. soybean carryout. In addition, if we see the cut in corn acres, we anticipate seeing a surge in soybean acres like we saw in the 2007/2008 production years when U.S. Soybean acres increased 10.977 million acres, or nearly 17% as fertilizer spiked.

A similar percentage increase this year would put 2022 soy acres at 102 million. It will, however, be difficult to plant over 180 million acres of corn and soybeans combined, so it may end up closer to 85 million corn and 95 million soybean acres to keep the total in line with 180 million.

What we don’t know is if fertilizer prices will abate by next spring which could change this scenario to see only a minor increase in soy acres. 

AgMarket.Net has advised producers to be aggressively hedged/sold (50% of anticipated production) on 2022 soybean production, which was done at $12.60. As always, feel free to contact me directly at 815-665-0461 or anyone on the AgMarket.Net team at 844-4AGMRKT. We are here to help.

Reach Jim at 815-665-0461,  [email protected] or on Twitter @jpmccormick3.

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