Against the grain: bearish US forecast sows seeds of doubt in corn market

After more than four years of low prices, extreme weather, and a trade war with China, frustration on American farms seems to be boiling over.

For one farmer, last week’s shock forecast from the US Department of Agriculture — which pushed corn futures prices down 6 per cent, the largest daily sell-off in six years — could have been the final straw. The person phoned to threaten violence against a USDA employee taking part in an annual crop tour held this week, the government said, as it pulled its entire staff from the privately run trip.

The USDA’s projection was a stunner: it said it expected only a 4 per cent drop from 2018’s average yield despite record rainfall earlier in the year in the US, the world’s biggest corn producer.

The forecast came amid bumper harvests from other leading corn exporters such as Brazil and Ukraine. If the US government’s numbers were to materialise, the world corn market would have a big glut on its hands, warned Abdolreza Abbassian, senior grain economist at the UN Food and Agricultural Organization. “You will have a huge supply overhang,” he said. “There will be too much corn in the world.”

Compared with the average private estimate of 13.2bn bushels of corn, the USDA predicted 13.9bn. Corn prices are now trading at $3.6 a bushel, down 12 per cent from before the data were published.

The forecast also hit companies reliant on agricultural spending. Corteva, the former agribusinesses of Dow and Dupont which supplies seeds and fertilisers, lost ground along with Deere & Co, the tractor maker. Agricultural traders, whose margins are also affected by commodity prices also fell, with Bunge closing down 7 per cent on the day.

Discrepancies between US government forecasts and private estimates are not unusual, but the unrelenting rain which pushed up corn prices earlier in the year made forecasting particularly complicated, said market analysts. On top of all that was Washington’s compensation programme for growers affected by the US-China trade spat, which encouraged farmers to plant as many acres as possible.

“This was such an unusual year,” said Seth Meyer, research professor for the Food and Agricultural Policy Research Institute at the University of Missouri, who until recently chaired the USDA’s committee which oversees the monthly crop figures. “Going into this report, people had convinced themselves that area and yield could only go in one direction,” he added.

Farmers in the Midwest generally rotate between soyabeans and corn. Planting for soyabeans tends to be later, so growers facing delays in corn planting often switch to soyabeans.

However, this year, US growers were swayed by the weather-related surge in corn combined with weakness in soyabeans, which had fallen on fears over the effects of the trade war between Washington and Beijing, as well as China’s outbreak of swine fever. China is the world’s largest soyabean importer, crushing them to feed pigs and poultry.

In June, the USDA had slashed its planting and crop production numbers in the wake of the bad weather. But farmers kept their eyes on the soyabean-to-corn price ratio, which tends to fluctuate between 2.5 to 3. It was close to 2 around the end of May — a level not seen since 2013, and implying much higher returns for corn. “The price signal said, if you can plant corn you should plant corn’,” said Prof Meyer.

This year’s August USDA crop numbers were also notable for the scepticism they generated among traders and analysts. For one thing, the delayed planting meant slower-than-normal crop development. For another, the USDA made a change to the way it gathers data for the month by eliminating its on-field, “objective” survey.

Lance Honig, crops chief at the USDA’s National Agricultural Statistics Service, told the Financial Times that the on-field survey for August was scrapped due to the low reliability of the data in previous years. Instead, the numbers were based on mail and phone surveys of 21,000 growers. “We found that our farmer-reported yields were more accurate,” he said. “We felt it made more sense to . . . focus our resources and efforts.”

The market is now looking for more solid clues on the yield. Come September, the USDA will conduct an on-field survey as normal, while the harvest may still may be affected by bad weather. There is also a question over how low prices will impact farmers’ appetite to harvest all the corn that they have produced, said Amy Reynolds, an economist at the International Grains Council.

Joe Glauber, research fellow at the International Food Policy Research Institute, and a former chief economist at the USDA, believes that it may not be until October that the market gets a fuller picture of the actual crop.

“A lot can happen between now and then,” he said, predicting high price volatility over the next few months.

For now, things remain tense. Andy Weber, chief executive of Farm Journal, the parent company of the tour organiser, said the company had taken the threat to the government staffer “very seriously”. “It’s clearly a stressful time right now,” he added.