# Corn Yield Estimate Likely To Drop Further

In late June, I wrote about the potential of a bull market occurring in the corn market. On August 10, 2012, the USDA will release its most recent estimate of the yield and size of the U.S. Corn crop in its WASDE report. The last report, released on July 11, dropped the yield estimate from 166 to 146 bushels/acre( b/a).

At that time, the percentage of the U.S. corn crop rated excellent or good was 40%. Because of high temperatures and lack of rain, crop conditions have continued to fall. The most recent release had crop conditions falling to 24% in the good to excellent category, and 48% in the poor or very poor category.

The previous year, I wrote an article that provided an econometric estimate of the August crop yield, after finding a statistically significant relationship between the crop condition in the combined excellent and good categories with the USDA's August yield estimate. You can look at that article again for the methodology used; it "missed" the USDA August estimate by .9 b/a.

This year I expanded the range of data to the previous six years instead of five. This provided a higher R^2 to the data; which, in layman's terms, just means a better fit. A snapshot of the regression results is shown below:

(click image to enlarge)

The statistical significance of the regression can be shown by the t-ratio being above 2. The variable Ex_aug is simply the crop condition categories of good and excellent added together from the crop condition report, which most recently precedes the WASDE release date. There will be one more report next Monday, before August 10.

However, I will assume there will not be much difference in crop conditions. The following equation is how you get a "point" estimate of the corn crop yield.

1) Estimated Yield = const + Ex_aug

2) Estimated Yield = 97.29 + ( .907593 * Ex_aug)

3) Estimated Yield = 97.29 + ( .907593 * 24)

4) Estimated Yield = 119.07 or 119.1 b/a

Just use the categories of the corn crop in the good to excellent category in the next crop condition report to compute a new "point" estimate. A simple back of the envelope way is to add or subtract .9 for each rise above 24 or drop below in the good to excellent category.

My custom weighted state crop condition index actually provided a bit higher estimate of 119.9 b/a, since it stands at 24.88. The 90% confidence interval for this "point" forecast is 108.6 - 131.2 b/a.

Here is an excellent link to an explanation of how the USDA conducts its survey for the crop yield estimate. Usually, this market commentary from the CME Group will provide information about what the "market" is expecting from the USDA report. Mexico did not even wait until the report to make its largest purchase of U.S. corn in over two decades!

Only speculators should be putting on positions in the corn market before the release of this report. If you are still sitting on large, long profits in the corn market, it is time to move up stop orders. Traders who do not have a futures account can use the ETF, CORN, to take a position in the corn market.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CORN over the next 72 hours. I have positions in corn futures and options