By John Newton, Scott Irwin, and Darrel Good, Farmdoc Daily
The USDA's August Crop Production report forecast the 2014 U.S. average soybean yield at 45.4 bushels per acre. That exceeds the previous record yield of 44.0 bushels in 2009 and is 1.7 bushels above our calculation of the 2014 (unconditional) trend yield based on actual yields from 1960 through 2013.
Comments by traders and market analysts indicate there is a widespread expectation that the forecast will increase in subsequent Crop Production reports. This would explain the weakness in soybean prices since the release of the August report.
There is an old market saying that "big crops get bigger" and this appears to be the basis for the expectation that USDA soybean yield forecasts will increase in subsequent Crop Production reports. That is, in years when the final yield estimate is well above trend, the USDA forecast of the average yield tends to increase from August forward.
Recent research by Isengildina, Irwin, and Good documents this tendency in USDA corn and soybean forecasts. However, these same authors argue that the shortcoming of this type of analysis is that it is backward-looking.
Specifically, the analysis starts by identifying years when the final yield estimate (typically January) is well above an in-sample calculation of trend and then traces the pattern of yield forecasts from August through the final estimate in January after harvest. That analysis can be more aptly identified as answering the question "did big crops get bigger."
Isengildina, Irwin, and Good go on to analyze whether crops that are expected to be big actually get bigger, or "do big crops get bigger." Specifically, they identify years when the August USDA forecast is large relative to an out-of-sample trend yield estimate and then test whether forecast changes in following USDA Crop Production reports (September, October, November, and January) can be predicted based on the trend-deviation of the August forecast.
Very little evidence for either corn or soybeans is found that "big crops get bigger" (or "small crops get smaller") based on this forward-looking analysis and the authors conclude that, "...this bias may appear obvious to market analysts in hindsight but it is difficult to anticipate."
We updated and extended the analysis of Isengeldina, Irwin, and Good for the U.S. corn yield in big crop years in a recent farmdoc daily article. The analysis revealed that: 1) historically, not all big corn crops get bigger, 2) weather conditions through July this year were not completely consistent with an average corn yield that has one of the highest positive deviations from trend, and 3) average August temperatures in 2014 year may not be consistent with a large increase in the USDA corn yield forecast from August to January.
We concluded that the results did not necessarily imply that the U.S. average corn yield will not increase, only that such an outcome would be highly unique given the nature of the 2014 growing season.
In this article, we extend the analysis of big crop patterns to the U.S. average soybean yield. We again update the sample used by Isengildina, Irwin, and Good through 2013 and then determine whether the additional data change their results for soybeans.
Next, we extend the analysis by limiting our focus only to years with large expected positive deviations from trend in August. In addition, we compare summer weather in 2014 to previous years identified as having a similarly large expected trend deviation and look for other statistical clues that might be helpful in projecting future changes to USDA soybean yield forecasts.
The analysis might provide an objective basis for forming expectations about changes in yield forecasts this year based on what is known in early September.
Continue reading "Do Big Soybean Crops Always Get Bigger?" online at Farmdoc Daily.