Urbana, Illinois
June 20, 2005As corn and
soybean prices move higher, it is useful to try to estimate the
U.S. crop size that is reflected by current prices,
said a University of
Illinois Extension
marketing specialist.
"Obviously, a precise estimate cannot be made because other
factors are influencing price," said Darrel Good. "In addition,
the relationship between the crop size, consumption, and price
varies over time. Still, the prospective crop size is a useful
question to pursue."
Good's comments came as he discussed recent developments in the
corn and soybean markets, where prices continue to move higher
in anticipation of yield reductions due to adverse weather
conditions in the United States.
"Soybean prices are also being supported by indications that
acreage in the United States fell short of March intentions, by
crop concerns in China and India, and by a rapid rate of
consumption of the 2004 crop," he noted.
"Corn price strength has been much more modest than the increase
in soybean prices due to large current stocks and indications
that U.S. acreage exceeded March intentions."
A starting point for estimating the U.S. crop size can be found
in the USDA's current projection of the level of stocks at the
beginning of the
2005-06 marketing year and the magnitude of consumption during
the 2005-06 marketing year. The current average farm price of
corn and soybeans during the 2005-06 marketing year as reflected
by the futures market can be calculated based on a forecast of
average basis and the monthly distribution of farmer marketings
during the 2005-06 marketing year.
Good used the three-year average monthly basis and the five-year
average of monthly marketings (as a percentage of the total for
the year) to make the calculation. Using that process, the
futures settlement price from overnight trade on June 20
reflected an average 2005-06 marketing year farm price of $2.40
for corn and $7.20 for soybeans.
"Given the USDA projections of beginning stocks and use and the
current forecast of the average marketing year price, the only
missing factor is crop size," said Good. "Based on the
historical relationship, an estimate of the year-ending stocks
to use ratio implied by the current prices can be calculated.
"The difficulty, as described in previous reports, is that the
relationship between price and stocks appears to have shifted
over time. For both corn and soybeans, the 'fit' between stocks
and price was quite strong from 1989-90 through 1997-98, but a
downward shift seemed to have occurred during the period 1998-99
through 2003-04 such that a given level of stocks to use was
associated with a much lower price during the latter period."
Which of these time periods, if either, is appropriate for
forecasting the relationship in 2005-06, Good asked. For now, he
favors using the relationship during the earlier period, because
that relationship more closely reflects the stocks and price
situation being experienced during the current marketing year,
particularly for soybeans.
"The average farm price of soybeans reflected by the current
futures market--$7.20--implies a 2005-06 marketing year-ending
stocks to use ratio of 5.8 percent," said Good. "Given the
USDA's projection of use of 2.964 billion bushels, the ratio
implies ending stocks of 172 million bushels, 83 million less
than projected by USDA and implying a crop size of 2.812 billion
bushels.
"If harvested acreage of soybeans is near 72 million, rather
than the 72.6 million suggested by the March Prospective
Plantings report, the market is trading an average yield of
about 39 bushels per acre, compared to the trend yield of 39.9
bushels. Since year-ending stocks cannot realistically be
smaller than about 4 percent of use, a crop smaller than 2.765
billion
bushels--34.8 bushels per acre--would require consumption to be
smaller than projected by the USDA. The need to ration use can
result in sharply higher prices, at least for a period of time."
The average farm price of corn reflected by the current futures
market
($2.40) implies a 2005-06 marketing year-ending stocks to use
ratio of 13.5 percent, or 1.44 billion bushels if consumption is
near the 10.67 billion bushels projected by the USDA. That level
of stocks is 1.1 billion bushels smaller than the current USDA
projection, implying a crop of 9.885 billion bushels.
"If harvested acreage is near 75 million, rather than the 74.2
million suggested by the March Prospective Plantings report, the
market is trading an average yield of 132 bushels per acre,
compared to a trend yield of 145 bushels," said Good.
Good said that based on the historic relationship between the
last USDA crop condition report of the season and the average
yield, the percent of the crop rated good to excellent that
points to a soybean yield of 39 bushels and a corn yield of 132
bushels can be calculated.
"That calculation is 53 percent good or excellent for soybeans
and 48 percent good or excellent for corn," he said. "Current
ratings are well above those levels.
"The price and yield exercise described here has a number of
shortcomings, but might be helpful in judging when to price new
crop corn and soybeans."
By Bob Sampson, PhD |