USDA Aggressively Lowers Corn and Soybean Yield Estimates

Monday, August 15, 2011

With weather forecasts calling for much needed rain in more moderate temperatures in the northern parts of the Midwest, some traders believe that the USDA may have been too pessimistic on its Soybean yield estimate. Should the weather cooperate, we could see a sell-off in Soybeans, with a test of the March lows possible. Some bearish traders may possibly wish to consider exploring selling November mini-Soybeans futures, with a potential downside price target near 1240.00. Traders may wish to consider placing a protective buy-stop above near-term resistance at 1383.00 should prices move higher.

Fundamentals

It appears that the US will produce less grain than had earlier been anticipated if the most recent USDA crop production estimate holds true. On Thursday of last week, the USDA released its August Crop Production report, which is the first report of the season that uses actual observations. In the report, the USDA lowered its estimate for Corn production to 12.914 billion bushels, which is down over 500 million bushels from July's 13.470 billion bushel estimate, as the hot July weather appears to have taken its toll on the crop, as average yield estimates were lowered by nearly 6 bushels per acre to 153 bushels per acre. The USDA also lowered its projection for the Soybean crop by over 3% to 3.056 billion bushels, which was well below even the most pessimistic pre-report estimates. Yield estimates were lowered by a shocking 2 bushels per acre to 41.4 bushels per acre. Many traders were surprised initially by the USDA's aggressive lowering of estimated yields, especially for Soybeans, as August is usually the key month for Soybean production and weather conditions have improved so far this month. Lower production estimates caused the USDA to lower 2011-12 carryout estimates for Corn to a very tight 714 million bushels, and for Soybeans to 155 million bushels. Both of these carryout levels would be near or at historic lows, and these figures take into account cuts to both domestic demand and exports due to high prices needed to ration demand. Prices rose sharply at the 9:30 am opening on Thursday, with Corn futures up the 30-cent limit and Soybeans trading sharply higher. However, there was a pullback in prices not long after the opening, as weak longs booked profits fearful of the heightened volatility seen in the commodity and equity markets this past week. The growing consensus among traders is that the USDA may have to further reduce Corn yield estimates as we get near harvest, as it appears that the key states of Illinois and Indiana will continue to see lower yields, as the hot and dry weather condition in July wreaked havoc on late-planted fields. Soybeans traders are still holding out hope for a recovery and will need ideal conditions through harvest to make that happen.

Technical Notes

Looking at the daily chart for November Soybeans, we notice prices trading near the mid-level of a nearly 8-month consolidation phase. Prices are also caught between the 20 and 200-day moving averages, leaving the near-term trend in some doubt. The 14-RSI is holding below 50, but has turned up with a current reading of 45.53. The recent low of 1282.00 made on August 9th looks to be support for November Soybeans, with resistance found at the July 19th high of 1409.50.

Mike Zarembski, Senior Commodity Analyst