Bare Knuckles Ag ™

Pick one: Either USDA is too bearish or some 2020 crop futures too strong.

Background: I plugged Friday’s November WASDE numbers for 2019-20 and USDA’s recent initial “baseline” balance sheets for 2020-21 corn, wheat and soybeans into my WASDE Wizard ® forecasting model under 3 weather scenarios with interesting results. The next three tables show the model’s bottom-line results. USDA baseline figures are in the center column for 2020-21. Then, to either side I show what my Wizard model churns out using decades of WASDE history for the impact of changes in yield and/or acreage harvested on USDA’s farm price forecasts.

2020 corn futures offer the strongest “weather premium” relative to USDA outlook

FIGURE 1

The model shows USDA’s “baseline” forecast for an average farm corn price of $3.40 in 2020-21. Using current national avg. basis for corn, here’s what the Wizard model churns out for the “futures equivalent” price range comparable to the wide range USDA formerly offered in initial balance sheets each May to allow for weather-related variance as the growing season unfolded.

To the left of the baseline numbers above, you see what the Wizard model churns out plugging in a yield 4% below baseline and to the right, what the model churns out plugging in a yield 1% above baseline. Farmers are frequently counseled by advisors to aim for an average price in “the top third of the price range for the year” while buyers are counseled to aim for an average price in the lower third.

The Wizard “converter” calculates the threshold for each goal in the bottom two lines. What jumps out: December 2020 corn futures are are already near the high end of the model’s price range under the adverse weather scenario for 2020.

While not as strong as for corn, an “adverse weather” premium in 2020 CBOT wheat futures, too.

FIGURE 2:

Special note: A common complaint among wheat growers is limited value of an “all wheat” balance sheet since there are 5 different classes of wheat traded at three different exchanges with significantly different balance sheets and price ranges. My Wizard model thus parses USDA “all wheat” prices into the “implied” prices by class using current spread relationships in CBOT, KCBT and MGE wheat futures. While not as dramatic as for corn, July 2020 CBOT wheat futures also reflect an “adverse weather premium.”

New crop SOYBEAN futures the exception: In line with USDA baseline yield and price assumptions for 2020-21.

FIGURE 3:

USDA’s initial baseline figures used a trendline yield of 50.5 bpa and an average price of $8.85 per bu. Using current national average basis, the model shows a “futures equivalent” and price range comparable to the wide range USDA formerly issued with initial WASDE estimates in May of each year to allow for weather-related variance. Trading in the mid-$9s, November 2020 soybean futures are within the “baseline” price assumptions. However, as of this writing they are just above the threshold for the “upper third” of a price range comparable to the range USDA formerly offered in its May WASDE estimates to allow room for weather variance as the growing season unfolded.

Dan Manternach, President

Perfect Fit Presentations, LLC

http://perfectfitpresentations.com

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