Crops > Outlook & Prices > Current Outlook

Starting to frame up the damage

pdf fileAgDM Newsletter
September 2020

We’ll remember August 2020 for quite some time in Iowa agriculture. When the month began, we were holding on the prospects of strong corn and soybean crops, despite some drought issues across the western part of the state. Nationally, yield projections pointed to a record corn crop and a near record soybean crop. Now, as we enter September, we haven’t got a firm grasp on the damage that was inflicted by the continuing drought and the derecho that struck the state mid-month. While national crop ratings remain near average, the Iowa crops have been severely impacted. The challenge right now is figuring out how many Iowa acres may disappear from this year’s balance sheet, either because they are mechanically unsuitable for harvesting or completely flattened by the derecho. As acres disappear from harvesting, crop production goes down, but average yields improve. Those decisions are being made now as crop insurance adjusters work with farmers to determine a pathway forward. And that makes what I’m about to do very suspect. Below I will lay out a rough estimate of the potential damage, based on crop condition rating models for yields. Take these estimates with the whole salt block, not just with a grain of salt, as there are many reasons why this could be wildly inaccurate. But it can provide a framework for understanding why the crop markets have reacted as they have.

2020 corn crop estimates

From the national perspective, the corn crop had been rated above average for most of this year. It wasn’t until the last couple of weeks when the ratings slipped below average. And above average corn ratings around and after tasseling usually coincide with above trendline yields. This outlook was confirmed with USDA’s August reports, which give us a snapshot on projected crop production as of the beginning of August. USDA rolled out with a national yield of 181.8 bushels per acre, which is in-line with a simple crop conditions model I have used the past several years (the model is just a linear regression of national yield versus the sum of “Good” to “Excellent” crop rating percentages for the week and a yearly time trend, for the nation and for Iowa this model has an R2 over 90%). The Week 31 ratings cover the beginning of August and 72% of the national corn crop was rated good to excellent and the yield model pointed to a national yield of 182 bushels per acre. While the drought has been building throughout the summer, the derecho struck August 10 and the first set of crop condition ratings it would have impacted is for Week 33. The slow decline in corn ratings accelerated after the derecho. Now, as we enter September, only 62% of the national corn crop is rated good to excellent. That drops the projected yield to 177 bushels per acre, a 5 bushel decline. So the national crop moved from a slightly above trendline crop (remember USDA’s trendline yield to begin the year was 178.5 bushels per acre) to a slightly below trendline crop. Given USDA’s projected harvested area, the yield drop translates to a 420 million bushel decline in corn production. It is a large projected loss, but in the grand scheme of the national corn balance sheet, it does not change the overall story greatly. National production would fall from a projected 15.278 billion bushels to 14.858 billion bushels. It would fall from a record setting crop to the 2nd largest crop on the books. Even with some adjustments on the usage, 2020/21 ending stocks would be growing under the new projection and prices would fall, just not as steeply as currently forecast.

Roughly half of this production decline would come out of Iowa. As Figure 2 shows, the Iowa corn crop ratings have fallen off much more steeply than the national ratings. At the beginning of August, 73% of Iowa’s corn crop was rated good to excellent. Now, only 45% is. The crop conditions yield model suggests that takes 16 bushels per acre out of Iowa. Given earlier harvested area estimates, that translates to 217 million bushels of lost production. Looking back at history, two years had similar drops in crop ratings, 1989 and 2003. Both years were affected by late season droughts, like this year. And for both years, the crop conditions model underestimated yields (remember, take these results with the whole salt block). The confounding factor here is the derecho and its impact of area harvested.

figures 1-2

2020 soybean crop estimates

For soybeans at the national level, the story is very similar to corn. The national soybean crop had been rated above average for most of this year. Those ratings have fallen throughout August. And above average soybean ratings usually coincide with above trendline yields. This outlook was confirmed with USDA’s August reports, which give us a snapshot on projected crop production as of the beginning of August. USDA projected a national yield of bushels per acre, somewhat above the yield projection from the crop conditions model of 51.5 bushels per acre. The Week 31 ratings cover the beginning of August and 73% of the national soybean crop was rated good to excellent. Now, as we enter September, only 66% of the national soybean crop is rated good to excellent. That drops the projected yield to 50.5 bushels per acre, a 1 bushel decline. So the national crop remains a slightly above trendline crop (remember USDA’s trendline yield to begin the year was 49.8 bushels per acre). Given USDA’s projected harvested area, the yield drop translates to an 83 million bushel decline in soybean production. Again, a large projected loss, but in the grand scheme of the national soybean balance sheet, it does not change the overall story greatly.

Almost half of this production decline would come out of Iowa. As Figure 4 displays, the Iowa soybean crop ratings have fallen off much more steeply again. At the beginning of August, 73% of Iowa’s soybean crop was rated good to excellent. Now, only 50% is. The crop conditions yield model suggests that takes 4 bushels per acre out of Iowa and given earlier harvested area estimates, that translates to 37 million bushels of lost production. Looking back at history, it is those same two years that had similar drops in crop ratings, 1989 and 2003. However, the crop conditions model over-predicted soybean yields in 2003 and under-predicted in 1989.

figures 3-4

Market outlook

The markets have gradually worked in the drought and derecho impacts over the past few weeks. At the beginning of August, futures prices outlined potential season-average prices around $3.15 per bushel for corn and $8.50 per bushel for soybeans (just a bit higher than USDA’s August projections). Now, futures point to $3.50 per bushel for corn and $9.40 per bushel for soybeans. For corn, this would still be 10 cents below the prices for the last couple of years. For soybeans, this would lift us back to prices we captured in 2016 and 2017, reflecting a tightening stocks situation.

 


Chad E. Hart, extension economist, 515-294-9911, chart@iastate.edu