The United States will certainly harvest a huge corn crop in 2016, so it hardly matters if yield falls by a couple of bushels, right? Actually, it does.
Without dissecting the balance sheet and crunching the numbers, it might be hard to understand why slight variations in yield make a big difference in domestic supply.
Last month, the U.S. Department of Agriculture projected that domestic farmers will harvest 15.15 billion bushels of corn over the next couple of months, which would easily set a new record for the world’s leading corn supplier.
USDA also penciled in 2.409 billion bushels of corn carryover at the end of the 2016/17 marketing year, which began on Sept. 1. This would be the largest such volume since the late 1980s.
Since the rest of the world thinks in metric tons (tonnes), it is helpful to think of 2.409 billion bushels as 61.2 million tonnes. For comparison’s sake, Brazil, the world’s No. 3 corn producer, is slated to grow 80 million tonnes of corn in its upcoming season.
USDA’s current U.S. corn yield of 175.1 bushels per acre is propping up domestic supply projections in a big way, but what if yield falls short of that target? And how much would we have to lose to flip market sentiment?
Answer: Not much
All components of the 2016/17 U.S. corn balance sheet are subject to potentially drastic changes as the marketing year is just hours old, but let us assume that all variables remain constant except for yield in order to see how variations affect the supply.
Under the same 86.55 million harvested acres, trimming yield by 1 bushel to 174.1 bushels per acre removes 85 million bushels, or 2.2 million tonnes, from the harvest. This is a relatively negligible difference if demand does not change, but 174.1 bushels per acre may be an optimistic estimate.
If final corn yield, which will be revealed in January, ends up at USDA’s original 2016 trend value of 168 bushels per acre, this would reduce production by 613 million bushels. This converts to about 15.6 million tonnes – a few percentage points lower than the volume of corn shipped last season by the world’s No. 4 supplier, Ukraine.
The 168 bushel-per-acre figure is now on the low end of industry estimates, but based on summer weather patterns and recent field observations, this number may be just as much in the mix as 175.1 bushels per acre.
And replacing 175.1 with 168 on the current U.S. corn balance sheet would bring the 2016/17 carryout of 2.409 billion bushels to 1.796 billion bushels. This is much closer to the previous two seasons, 1.731 billion (2014/15) and 1.706 billion (2015/16). (reut.rs/2bYGT6s)
Corn yield would have to come in at or below the 170.2 bushels per acre projected by farm advisory service Pro Farmer for a carryout below the 2 billion-bushel mark. Even though it is not entirely logical, simply seeing a "1" instead of a "2" in front of carryout could curb some of the corn market's bearish momentum of late.
Yield is only one piece
In the last two seasons, corn harvested area fell on average about half a million acres from the August estimate to the January final number after all land registrations to the Farm Service Agency (FSA) were counted and considered.
Many analysts believed that the economics this year did not favor as many corn acres as USDA reported in its June 30 acreage report, so area could be on its way down again. Let us see what would happen if the current 86.55 million harvested acres became 86.0 million instead.
If USDA’s optimistic 175.1 bushel-per-acre yield proves true, the new harvested area assumptions remove only 94 million bushels from production. But if yield were reduced to the 168 bushel-per-acre trend, this would remove 700 million bushels from production, cutting ending stocks to 1.704 billion bushels.
In January, the actual production – harvested area and yield – will be the first piece cemented into the 2016/17 balance sheet. But the demand side of the ledger is subject to large changes for at least another year from today, so it is a bit difficult to pick out numbers and draw up scenarios right away.
Either way it is clear that very moderate and reasonable changes to area and yield can easily cut supply right back down to last year’s levels, so even slight bumps in demand can send carryout even lower throughout the next year.
And increasing demand is not a terrible assumption. Domestic ethanol production has been very strong this summer and major competitor Brazil is coming off a disappointing harvest, to mention just two factors.
So if you find yourself wondering, "Do I really need to nitpick over 1 bushel per acre?" Yes, you probably should.