Between a rock and a hard place
The old line in crop marketing is “the quickest way to higher prices is for somebody to have a short crop, preferably someone besides us.” This year, the markets seem set to prove that line wrong. Drought conditions have cropped up in several places across the country, but the potential damage from drought has not been enough to spur on a weather rally in the crop markets. Many farmers in Iowa are watching their crops under weather stress without the usual benefit of the usually accompanying price boost. The calendar year of 2020 continues to be filled with unique challenges.
Over the past two weeks, drought has covered over half of the state of Iowa. Currently, nearly 63% of the state is classified as under drought, with nearly 13% of the state in severe drought. This drought has been building at just the wrong time for Iowa’s corn and soybean crops. The heat and dryness impacted the corn crop during pollination, potentially limiting the number of rows and kernels per ear. Drought stress in soybeans can limit growth and hasten early flowering and seed set, reducing yield. But while the drought conditions have spread throughout the state, crop prices have changed very little due to weather. The drought is not large nor severe enough (so far) to force prices higher.
One of the major reasons why, is that while drought conditions have worsened, crop ratings have not. Figure 2 shows the weekly summary of the national corn crop conditions from USDA’s Crop Progress reports. Despite the hotter, drier weather, experts still view over 70% of the nation’s corn crop in good to excellent shape. In fact, even as Iowa’s drought conditions grew last week, the national corn rating grew as well. Iowa’s corn rating did decline, but 77% of the corn crop is still rated good to excellent. Thus, the drought’s impact is not showing up in crop ratings, and therefore, is not affecting prices.
A similar story can be seen for soybeans. National soybean crop ratings show 72% of the crop is rated good to excellent. The 5-year average rating for this time of year is just over 63%. So the drought has yet to impact soybean ratings. In Iowa, over three-quarters of the soybeans are classified as good to excellent. It’s a strange combination: half of the state is in drought, but over 75% of Iowa’s corn and soybeans look good from the road. Right now, traders are holding to the crop ratings to set pricing.
A weather rally may still be in the offing, but the markets want proof of crop damage before allowing that to happen. The issue for farmers is that it may be September before we see that proof. Typically, August is the first month when USDA sends enumerators out in the fields for the objective yield survey, where they tally plant populations and ear and pod counts. But due to budget cuts over the past couple of years, USDA has moved the schedule back so that September is now the first month of the survey. The delay in the survey translates into a delay in critical data used to inform national yield estimates. And in extreme weather years, the objective yield data is even more important. And this year, that data may be as important as it ever was. Farmers, traders, and market analysts are all trying to compute whether the generally good planting season and ample soil moisture to start the growing season were enough to hold off some of the adverse effects of the drought. The crop ratings at this point suggest that they were. But the objective yield survey would provide a much clearer picture. And as it stands, the survey data is still a month and a half away.
So even though we have potential supply issues, the markets seem unmoved by them. In fact, the corn market has not only shrugged off the drought so far, but also the increase in advance export sales throughout July. While USDA’s 2020/21 season-average price estimate for corn sits at $3.35 per bushel, futures have drifted down to the point where they indicate a season-average prices in the $3.20 per bushel range. Soybeans have fared a bit better. The increases in Chinese purchases over the past couple of months for both the 2019 and 2020 soybean crops have provided support for soybean prices. And traders are holding soybeans in better regard than USDA’s price estimate. Currently, USDA projects the 2020/21 season-average price at $8.50 per bushel, while the futures market points to bean prices in the $8.70 per bushel range.
When we started 2020, crop futures favored corn over soybean. For the first two months of the year, futures outlined season-average prices above breakeven for both crops, but corn had the lead. COVID-19 sent both markets down below breakeven, but corn held on to a relative pricing advantage. That advantage has disappeared in July. So now, while corn prices are still drifting below breakeven, soybean prices have edged ever so slightly back above breakeven. August is traditionally a slow month for crop sales. While the drought may eventually lead to higher prices, that potential bump would be a lot closer to harvest than usual. And it would likely need some help from the demand side to create a large enough price swing to get farmers excited. Crop storage will be critical this harvest, and the impact from the August 10 derecho is not yet fully realized.
Chad E. Hart, extension economist, 515-294-9911, email@example.com