Corn Futures Fall After USDA Raises Yield Forecast

Corn futures dropped after the USDA increased its corn yield forecast, with December contracts ending 20 1/2 cents lower as traders reacted to a larger-than-expected production outlook. The report raised corn output and stocks while soybeans recovered despite a record yield forecast.

According to Brian Grete with Commstock Investments, the USDA increased corn yield by 2.7 bushels per acre to 181.2 bushels per acre, lifting production by 234 million bushels to 16.03 billion bushels. Ending stocks rose to 1.849 billion bushels, up 282 million bushels from September.

Grete said market expectations had been positioned for a lower yield before the report, which contributed to the sharp price reaction.

"And you get the not only increase, but huge increase. That’s the largest October yield increase back to 2004. And so it caught the market completely wrong footed there. And you see the massive wave of selling pressure that we saw on Friday coming out of the report." said Brian Grete, Commstock Investments.

The higher corn stocks pushed the stocks-to-use ratio to 11.3%, above the September estimate but still below the long-term average cited by Grete.

"Now, keep in mind, the long -term average for stocks to use in corn is 12.5. So we’re still below that. We’re just not as low as what the September WASDE report projected at under 10.

So we did change a little bit on that front. It’s not bearish, I don’t think, from that perspective," said Brian Grete, Commstock Investments.

Grete said the market may not need a major additional decline to account for the higher corn supply, while investor positioning could influence near-term movement.

"I don’t think we need to go a whole lot lower, to be honest with you. You know, the comfort range for corn carryover, the upper end is about 1.8 billion bushels. So we’re only 49 million bushels above that level with where the ending stocks were projected. So I don’t think you have to do a whole lot." said Brian Grete, Commstock Investments.

The analyst said managed money entered the report with a large long position and that fund decisions could affect prices more than supply fundamentals in the short term.

"They’d shaved off some from their record position but still heavily long. So very much a herd mentality within the managed money community and so if they all decide that they want to get out in mass, and that doesn’t mean that they have to get out all their length by any means, but if they if they get out in mass boy then we’ve probably faced some more heavy near -term price pressure so I would watch more on the managed money and what the funds do than worry about the fundamentals at the moment," said Brian Grete, Commstock Investments.

Grete also addressed whether large crop estimates could rise further, noting the October yield increase was the second largest ever behind last year’s record.

"Well, that’s the mantra, big crops get bigger. And this is definitely in that category because it’s the second largest ever behind last year’s record. So I think that there is some risk of that. But boy, that 2.7 bushel increase in yield feels like USDA overshot it." said Brian Grete, Commstock Investments.

The USDA increase came from higher implied ear weights, according to Grete, even though ear counts declined across the 10-state area used in the assessment.

"Now, there were a couple of states that did have month over month increases in ear counts. That’s not unprecedented, but somewhat unusual. The big takeaway here is that implied ear weights, because you had the 10 state ear counts that came down, implied ear weights actually had to go up and go up a significant amount month over month there. And so I think that’s the underlying story here is can we hold on to those big ear weights that USDA projected?" said Brian Grete, Commstock Investments.

USDA also raised soybean yield by 0.3 bushels per acre to 53.1 bushels per acre, creating a record forecast. Soybean production increased to 4.562 billion bushels while ending stocks rose by 5 million bushels to 315 million bushels.

"I think that we will see that we have a record soybean yield when all said and done. It’ll be something higher than the 53.1 that USDA came with in October. We’ll see where it ends up, but it’s going to be a record," said Brian Grete, Commstock Investments.

Grete separated production volume from crop quality issues reported by some farmers in the western Corn Belt after heavy September rains.

"Yield and quality are two separate things. So yield is what comes out of the field. And that’s what the futures market pays attention to.

Quality is a cash market issue that is reflected in discounts when you deliver to elevators, crush plants, whatever the case may be. So two separate things on that one." said Brian Grete, Commstock Investments.

The soybean market ended higher after the initial reaction to the corn decline faded, with November soybeans closing 4 1/2 cents higher.

"Huge bounce back. You know, the initial knee jerk reaction was tied to the corn market and the heavy sell off there. I think it’s" said Brian Grete, Commstock Investments.