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Key USDA report could harvest some big surprises for commodities

Corn is harvested
Daniel Acker | Bloomberg | Getty Images

On the eve of a key government crop report, corn futures remain at depressed levels as generally favorable crop conditions and analysts' forecasts point to potentially bin-busting harvests by American farmers.

Nonetheless, industry watchers have been trying to figure out if July's heat wave conditions may have hurt corn yields — and therefore production — since it happened when the crop was in pollination, a sensitive stage when the plant is susceptible to harsh summer weather.

The U.S. Agriculture Department will release the report Friday at noon and it could provide some answers that will move financial markets and help determine corn and soybean prices. The August World Agricultural Supply and Demand Estimates report, a monthly report known as WASDE, is USDA's first survey-based estimate of the U.S. corn and soybean yields for this season.

"As long as USDA doesn't give us a shockingly bearish report — i.e., they give us average yield that is well above what the trade is expecting — I do think there's a good chance that we find a low in here very soon and start to bounce back for corn and soybeans," said Ted Seifried, an analyst at the Chicago brokerage Zaner Group.

The weather bet

Some are betting the July weather opened the door to yield reductions in the corn crop, although at this point, it appears to be a modest hurt.

"Corn and soybean prices are actually implying a farm economy that may be showing signs of a bottom after marked declines the past three years," Feltl & Co. analyst Brent Rystrom said in a report earlier this month. He added that "historical analysis would suggest that excessive heat in July modestly hurt yields, especially in states like Illinois, Indiana, Iowa and Nebraska."

There's definitely room for these markets to go lower.
Joe Lardy
Research manager, CHS Hedging

At the same time, global demand also may help support ag commodity prices, particularly for the major cash crops such as corn, soybeans and wheat. Indeed, recent export sales of U.S. soybeans to China and other locations helped provide some support for beans during August. The value of ag exports in June reached over $10 billion, and the WASDE report will provide more information on export expectations.

"We expect a bullish demand-driven market for U.S. grains and oilseeds between September 2016 and March 2017, which should facilitate a recovery in prices," Societe Generale analyst Rajesh Singla said in a note Wednesday. "However, we do not expect a runaway rally in prices, as the exports/demand-driven market is usually less exciting than the supply-driven market."

The bears' case

And yet, others counter there could be more downside in the market.

"There's definitely room for these markets to go lower," said Joe Lardy, research manager for CHS Hedging. He explained that there's a bigger threat for soybeans than corn since beans pollinate more in the middle of August. The corn crop's pollination ran into July, and while there were excessive heat conditions, he still believes the crop is in good shape.

USDA's weekly Crop Progress report released Monday showed soybean conditions were essentially unchanged week over week but corn conditions deteriorated slightly. The government estimated that 74 percent of the corn crop was "good" or "excellent," which was down from the 76 percent the prior week. At the same time, the report showed 7 percent of the corn crop was considered "poor" or "very poor," up from 6 percent in the prior week.

"WASDE data… will solidify the picture that the adverse weather bet was wrong, and North America will have large crops in corn, soybeans and wheat resulting in materially weaker commodity prices in 2017," Longbow Research analyst Eli Lustgarten said in a note Thursday.

Low crop prices, which are pinching farm incomes, have already severely cut demand for major farm machinery companies such as Deere and AGCO, both in the U.S. and abroad.

"The outlook is deteriorating for Deere and other participants in the Farm Belt, suggesting an extremely tough operating environment over the next 12 to 18 months," Lustgarten said.

Deere is scheduled to report fiscal third-quarter earnings Aug. 19, and analysts have been lowering their earnings estimates for the July quarter and full fiscal year over the past 90 days, according to Thomson Reuters. Based on consensus estimates for the quarter, Deere is expected to report an EPS decline of 38 percent from a year ago on a revenue drop of 11 percent.

Main Street feeling ag woes

Disappointing farm incomes also are starting to show up in the broader economy and repayment rates on farm loans are softening, according to the Federal Reserve Bank of Kansas City's second-quarter survey of agricultural credit conditions released Thursday.

"Weaker farm income has continued to have an adverse effect on the District's Main Street businesses," said the Tenth Federal Reserve District, which includes a seven-state region (Kansas, Missouri, Nebraska, Oklahoma, Wyoming, Colorado and New Mexico).

"For example, at the end of July 2016, corn and soybean prices were 47 percent and 24 percent less, respectively, than the same period in 2013. Cattle and hog prices also were lower than a year ago and remained lower than in 2013," the report said.

On the Chicago Board of Trade, the benchmark corn for December was down fractionally at $3.32 a bushel on Thursday. The November soybean contract was up fractionally at $9.8625 a bushel. Corn has fallen about 23 percent in the past two months; soybeans are down 15 percent in the past two months but up 3 percent in the past week.

Sub-$3 corn possible before harvest

In the last WASDE report released July 12, the USDA lowered its 2016/2017 season price range forecast for corn to $3.10 to $3.70 a bushel from its previous estimate issued in June of $3.20 to $3.80 a bushel. That is still well below mid-June levels when December corn was around $4.48 a bushel.

"Our outlook is that prices for corn could get as low as $3 on the Chicago Board of Trade or even dip below $3 before harvest is completely done," said Sterling Liddell, a food and agribusiness analyst with Rabo AgriFinance in St. Louis.

Friday's WASDE report will include any changes in the government's price forecast for major crops. However, analysts say the corn and soybean yield per acre and production estimates will be among the most watched parts of the report.

Stack of corn
Sergio Flores | Bloomberg | Getty Images

"There are analysts that are estimating 175 bushels per acre (for corn)," said Liddell. "That could have a very negative effect on prices."

USDA's last forecast was for a national corn yield of 168 bushels an acre and current consensus among analysts is for 170.6 bushels an acre. The all-time high of 171 bushels an acre was set in 2014/2015.

Citi's commodity team said in a research note Thursday that "record yields could be in play," and the firm recently lifted its own yield estimates. Citi forecasts an average corn yield of 170 bushels an acre, and the firm "sees prices trading under $4 for the next few quarters with downside potential to $3.10 to $3.20/bushel."

"We think a large harvest may extend the pressure seen in crop input industries into next year," Citi said. The most common "crop inputs" used are fertilizer, ag chemicals, seeds and equipment.

Upside for livestock producers

That said, continued low crop prices could be good news for livestock producers looking to keep feed costs down. Feed costs can run from 60 percent to 80 percent of the cost of production for poultry and pork producers.

On Monday, U.S. meat processor Tyson Foods reported fiscal third-quarter earnings that exceeded estimates and indicated results were boosted by lower feed and livestock costs. Tyson produces beef, chicken and pork and indicated that domestic demand for protein has been strong and is expected to continue.

"If we look next year at what the forward curve in the corn and soybean markets is giving us, it looks like the next year's going to be pretty much flat to this year, so we feel good about the way next year is structured," Tyson CEO Donnie Smith said during the company's earnings call.