U.S. Corn Yield and Carryout are Not Reduced One-to-One
It seems likely that U.S. corn yield will fall below the government forecast of 170.7 bushels per acre, and even though a smaller harvest would shrink the burdensome carryout, the effect may be lighter than one might expect.
Analysts and traders are convinced that the U.S. Department of Agriculture will reduce its projection for U.S. corn yield when the agency releases its first survey-based yields on Aug. 10. Imperfect weather thus far has sent crop health ratings to a five-year low, and forecasts have not yet rid themselves of damaging heat and dryness.
According to USDA, the United States will begin the 2017/18 corn marketing year on Sept. 1 with an inventory of 2.37 billion bushels – the most in nearly three decades. When the year concludes, the country is projected to have reduced that supply by just 2 percent to a still-heavy 2.325 billion bushels.
Enter the widely anticipated cut to corn yield. If yield is reduced to 165 bushels per acre, which has been tossed around by several industry participants, new-crop carryout would drop down to 1.85 billion bushels if nothing else on the balance sheet was changed. For reference, carryout was about 1.73 billion in both 2014/15 and 2015/16.
Without a change to any other items, a yield of 160 bpa – which is not out of the question in some analysts’ minds – would return a 1.43 billion bushel carryout, the lowest in four years. It would require 157 bpa to halve the 2017/18 beginning stocks.
But a cut to production at this time of year almost always corresponds with a cut in demand, and this could mean that 2017/18 carryout stays north of 2 billion bushels even with a sizable decline in yield.
If USDA cuts yield to 165 bpa next month, it would be a 3.3 percent decrease from the long-term trend, which is modest compared with the historical declines.
Based on how USDA has moved use with yield in the past, an August yield of 165 bpa could translate into a carryout as high as 2.1 billion bushels instead of the 1.85 billion that the straight math suggests, though there remains an outside chance for a figure below 2 billion.
Lower Yield, Lower Use
There have been eight instances since 1996 in which USDA’s August corn yield came in lower than its long-term trend yield. Seven of those reductions were met with a corresponding decline in corn use between May and August.
These seven years had various levels of beginning corn inventory – including the highest and lowest stocks within the last two decades. USDA’s reductions to use were never as heavy on a percentage basis as the cuts to yield, either.
Of the three corn demand categories, the one known as FSI (food, seed, and industrial use) is subject to the lightest revisions between May and August. Since the mid-2000s, FSI has been comprised mostly of ethanol production, but this trend was true even in the years prior.
If yield is reduced in the August report, use cuts are more likely to appear in one or both of the two other demand categories: exports and feed and residual. Feed and residual includes both corn fed to animals and disappearance – the “unaccounted for” corn. Analysts sometimes accuse USDA of abusing the residual category when it cannot assign presumed corn use to feed, industrial, or exports.
Changes to corn use may also relate to what is happening in the wheat market. In 2001 – the only year in which USDA cut U.S. yield but increased use in its August update – the domestic wheat crop fell to a 13-year low while corn stocks were at multi-year highs.
The availability of corn compared with wheat that year may have been a factor in why use increased while supply decreased. The set-up is similar in 2017 – high corn stocks and the smallest wheat harvest since 2002 – which could inhibit cuts to corn use in next month’s supply and demand update. But futures prices of wheat are not elevated significantly relative to those of corn, which often lifts corn use.
If USDA is looking to make demand cuts, it needs to look no further than exports. Brazil and Argentina are currently harvesting a corn crop 44 percent larger than a year ago and the United States was sitting on the largest corn pile in 30 years as of June 1.
USDA projects 2017/18 global corn use to rise by 1.5 percent over the previous year, which is a relatively small increase compared with years past. Given the abundant supplies in the world’s top three exporters, there simply may not be enough room for the United States to ship next year’s 1.875 billion-bushel target, especially in the front half of the year when South American export activity will be heaviest.