Yield Expectations Decrease Leading Into Harvest

by: T. Marc Schober

Commodity prices suffered throughout the month of September due to the increasingly weary state of the global economy. Investors have been reallocating their assets in accordance to the European debt situation and worries of a double dip recession. Tight grain supplies are still present, but economic concerns and decreased demand continues to impact short-term prices.

U.S. corn yields were estimated 3.2% lower in this month's WASDE Report from the USDA due to a deteriorating crop condition. High prices have lead to a decrease in corn demand with livestock producers making the switch to wheat based feed to ration the extremely low U.S. corn supply. The USDA Grain Stocks report at the end of the month also confirmed such rationing.

The fall harvest has started in the U.S. Corn Belt. As of September 26, 15% of the corn crop had already been harvested and 5% of the soybean crop. A dry weather outlook for the Midwest should keep the harvest on pace with historical averages, but may continue to support lower crop prices in the near term.

Grain Prices

Corn prices decreased by 28.1% in September and closed at $5.92 per bushel due to the ongoing uncertainty of the global economy and decreased demand. Although U.S. corn yields were estimated 4.9 bushels per acre lower, demand decreased with rationing of the U.S. corn crop. In the quarterly USDA Grain Stocks report, old crop corn stocks were marked at 1.13 billion bushels which was higher than expectations. The rationing of corn is already having an effect on stocks. Wheat remains an attractive alternative for livestock feed even at current corn prices.

Soybean prices decreased 12.3% this month to $11.76 per bushel on the Chicago Board of Trade. The USDA estimated that U.S. production would be increased by 1% due to higher yields. Soybean end users have also made a switch to palm oil as an alternative to the current elevated soybean prices. The global supply of soybeans is also on the high side with South America sitting on excess soybeans due to cancelled Chinese imports. The USDA Grain Stocks report revealed slightly less than expected soybean stocks at 215 million bushels, although stocks are 42% higher than in September 2010.

Wheat prices were driven 22.0% lower during September to $6.09 per bushel due to the decrease in corn prices and increased outlook on the global supply. The Former Soviet Union nations have been reporting high yields which will now be able to be shipped around the world since the wheat export bans of the 2010 drought have been lifted. Contrarily, High quality wheat demand has been increasing due to the poor crops in the U.S. and Canada this year. U.S. wheat stocks were reported at 2.15 billion bushels in the recent Grain Stocks report, about 115 million bushels higher than expected by grain analysts.


The USDA updated the U.S. and World balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates (WASDE) report mid-month. Summer heat and excessively dry weather across the U.S. Corn Belt throughout August hurt crop conditions which led to a reduction in the estimated average corn yield per acre in the U.S. to the lowest since the 2005/06 season.
Neutral to slightly bullish news from the USDA as estimated average corn yields were decreased to 148.1 bushels per acre. Although current estimated yields are the lowest since 2005/06, this year's crop is on pace to be the third largest on record. 2011/12 supplies were decreased by 442 million bushels alongside a 20 million bushel decrease in beginning stocks and a 5 million bushel decrease in imports.

U.S. corn usage was decreased by 400 million bushels as supplies became tighter and rationing of the U.S. corn crop began. Feed and residual use was estimated 200 million bushels lower on decreased expected residual use on the smaller U.S. crop. Ethanol usage was also estimated 100 million bushels lower due to the increased price of corn and the Energy Information Administration's decreased forecast of gasoline consumption. U.S. exports were lowered by 100 million bushels on increased supplies and export expectations from Argentina, Brazil, and Ukraine.


The Creighton University Farmland Price Index increased to 66.9 from 61.9 in August. This marks the 20th straight month the index has been above growth neutral and the third straight month the gauge has risen. Consistent with the farmland values, farm equipment sales index increased to a 65.4 from August's 56.9. "Although both farming gauges are down from the beginning of the year, they are up significantly from September of last year reflecting very strong farm income growth," said economist Ernie Goss.

Farmland values in Iowa soared 34% over the past 12 months, according to the latest survey of Iowa real estate agents. An acre of medium quality farmland in the state of Iowa is now worth $6,477, which is higher than the previous inflation adjusted peak of $5,917 in 1979. Previously, the largest single year increase in value came in 2007 when farmland jumped 21.4%. High commodity prices and low interest rates were the two driving factors in the recent increase in farmland values, according to the survey.

The typical farmland selling season is approaching as crops are making their way into farmer bins. Farmers make up the majority of farmland buyers and now that farmers are able to sell their crop, they are able to use their profits to purchase additional land. We expect a large amount of farmland property to exchange hands this fall and winter.


The short-term commodity markets should remain volatile throughout the next few months due to the high level of uncertainty in the global economy. The long-term outlook on grains in particular still remains bullish in our view due to the strong fundamentals. Corn and soybean production is very low this year in the U.S. which gives little to no relief to the already extremely low corn stocks. Expect continued rationing of the U.S. corn crop moving forward into 2012.

The USDA Grain Stocks Report confirmed that rationing has been taking place in grains, and specifically corn. The markets have pulled back from their peaks and we will patiently wait to see if the bearish USDA report will trigger a slight rebound in demand although grain stocks to use ratios are still extremely low.

Despite the economic uncertainty, we expect grain prices to remain strong as lower prices will attract emerging markets such as China to provide price support. This fall should see a large amount of farmland sales if the harvest stays on schedule. Farmers will be cash rich and be looking to expand their operations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.