WASDE WIZARD ® Perspective on August WASDE Numbers
Huge yields tanked futures; export outlook recovers some.
WASDE Wizard® is 2-for-2 in post-release accuracy. Upon release of USDA’s June WASDE, the price forecasting model I’ve dubbed my “WASDE Wizard®” said the path of least resistance for prices going forward was down. Upon release of the July WASDE, the model showed futures had already discounted what I called “a worst-case scenario” and that any surprises going forward were more likely to be price friendly than to feed market bears. Figs 1 & 2 below show both were on target – until the stunning yield estimates in Friday’s August WASDE gave “worst case scenario” a whole new definition!
FIG 1: December corn futures
FIG 2: November soybean futures
Weekly crop condition ratings mislead again! Recognizing that weekly crop condition ratings have been slipping over the past month, traders still expected USDA to boost the corn yield to 176.2 bpa on average, 2.2 bu. higher than in July. Same story for beans; even though weekly crop condition ratings have been slipping slightly, they still exceed 5-year average ratings so the average trade estimate of 49.6 bpa was still 1.1 bpa higher than last month’s estimate. USDA’s actual August estimates for corn and soybean yields came in at a record 178.4 bpa and a near-record 51.6 bpa respectively. Futures tanked.
USDA methodology may need to be tweaked. We have year-to-year, back-to-back shockers on yield in August reports relative to pre-report trade estimates. Both were to the high side. Since the August crop report is the first one utilizing actual field checks and measurements, it tells me as an analyst that the current methodology for projecting yields prior to August may short-change improvement in hybrids and the increasing use of precision-ag technology by farmers. I suspect even initial May WASDE “trendline” yields are too low for the same reason.
So, what does the WASDE Wizard® say NOW about prices going forward? Once again, the model converts USDA’s forecast range for average farm prices to a “futures equivalent” using national basis for corn and soybeans, then calculates the net impact on this price range of either 1) further improvement in yields or 2) a lower-than-forecast yield once combines start rolling next month. Next the model calculates what price it will take for sellers to make the “top third” of those ranges or for buyers to keep costs in the “lower third” of the range.
FIG. 3: PRICE RANGE IMPACT IF CORN YIELDS CREEP HIGHER OR SLIP BY HARVEST
Next move more likely for buyers than sellers in corn: Converted to futures equivalent, the new “midpoint” of USDA’s August range for prices is $3.84, 12 cents higher than Friday’s close in December futures. In fact, the threshold for buyers to enter the lower third of the likely range if Friday’s WASDE holds up is only 5 cents away at $3.67 or lower. The next point to notice is that should average yield come harvest be 2% lower than forecast, the model shows only about a nickel boost to prices, whereas a final yield 2% higher than Friday’s figure would shave about a quarter off the price range at both ends. Which is most likely? Alas for farmers, a time-honored adage is that “big crops tend to get bigger.”
FIG. 4: PRICE RANGE IMPACT IF BEAN YIELDS CREEP HIGHER OR SLIP BY HARVEST