Yield trumps acres for 2011 corn & soy crops

The prevailing historically high grain prices are expected to provoke an aggressive supply-side response in 2011 as farmers try to capitalize on the strong economics of crop production. Indeed, the U.S. Department of Agriculture has projected the highest corn planted acreage total since 1944 and record high soybean seedings to take place this spring.

However, even if farmers manage to complete what may be the highest level ever of spring crop plantings, crop yields will likely need to surpass previous records if crop inventories are to be replenished to the degree required to pull prices lower.

STRONG DEMAND LOOKS HERE TO STAY FOR NOW

While recent focus has been on the extent of projected 2011 corn and soybean plantings in the U.S., the chief reason behind the prevailing price strength has been sustained domestic and overseas consumption interest for all major U.S. crops.

Wheat crop failures in Eastern Europe and the Black Sea region in mid-2010 steered international buying interest towards American shores since last summer, and served to spark a general resurgence in global grain export activity since then which has also underpinned corn and soybean prices.

At the same time, strong demand from ethanol manufacturers and cattle feedlots served to run down domestic corn inventories to multi-year lows, and provide a strong upward thrust to corn prices in the run up to the U.S. planting season.

Despite being equally reliant on corn as their key input, both ethanol and livestock producers have been able to accommodate the rising price of corn lately thanks to persistent price strength in their respective output markets and diligent input hedging whenever they make corn purchases.

Such risk management practices have become increasingly commonplace in the agricultural arena in the wake of the 2008 grain price rally, which drove many industry participants with less diligent hedging practices into bankruptcy. Indeed, the widespread practice of conservatively managing input and output risks throughout 2010 and into 2011 looks set to ensure that those key corn market participants remain active consumers for the foreseeable future - even in the face of near record high crop prices.

Strong global demand has also underpinned soybean values, and ensured that that crop also has a strong case for increased output in the U.S. and elsewhere in 2011, especially after growing problems in major exporter nation Argentina, as well as recent export strikes in that country as part of ongoing labor negotiations.

The end result has been a protracted race higher in price as each crop attempts win output increases the expense of the other through locking down acreage across the Midwest growing belt.

TIGHT STOCKS HARD TO REBUILD

Although U.S. farmers seem committed to plant a record amount of acres to both corn and soybeans this spring, total production levels of those crops are not likely to be high enough to substantially rebuild crop stocks from their presently emaciated levels. Corn stocks are projected to fall below 700 million bushels by the end of the 2010/11 season (August 31), representing less than 20 days of consumption, and marking the lowest level of U.S. corn ' ending stocks' in more than 15 years.

Soybean stocks are projected to slip to 141 million bushels, or 15 days of demand, which would mark the third lowest soybean stock level in 10 years. Graphic of U.S. corn and soybean ending stocks:

Such critically low inventories indicate that the upcoming crop must not only be large enough to refill present stockpiles to more traditional levels, but must also be adequate enough to accommodate end-user demand throughout the following year until the next crop is harvested in the fall of 2012. High planted acreage projections are clearly an important component of generating crops of that scale. But such projections are merely aspirations until the crops are actually in the ground, and from that point on must be nurtured by ideal nonthreatening growing conditions throughout the upcoming summer if the full potential of record high planted acres is to be fulfilled.

THE 'YIELD DRAG' FROM RECORD CORN ACRES

As promising as high planted acres may sound when making early projections about potential crop sizes, the limited amount of top-tier high-yielding land means there can be significant overall yield penalties when planted area spans into less productive regions, especially in corn. Historical data shows that whenever corn plantings have been largely confined to the top producing areas of Iowa, Illinois, Nebraska, Minnesota and Indiana - and so do not extend into areas not traditionally conducive to corn production - the national yield total tends to benefit, such as it has in recent years since corn plantings were scaled back from their multi-decade highs of above 90 million acres in 2007.

But, when a significant portion of the national corn crop resides in second tier corn states such as Kansas, Ohio, Wisconsin and South Dakota, the overall yield tends to suffer, as it did in 2007 when corn seedings topped the 90 million mark for the first time since World War Two.

Given that 2011 corn crop projections call for the highest levels of planted corn acres in close to 70 years, it is a safe bet that many of those acres will be located outside of the very best corn-producing areas, and that those acres can be expected to make an uneven contribution to the overall yield.

More importantly, these second tier acres are likely to play a crucial role in the 2011 crop production saga. Given the critically low level of corn inventories, and the sustained strength in consumption interest, an increase in the national corn yield from last year's average of 152.8 bushels an acre is essential if any further stocks depletion is to be avoided.

Indeed, if we assume that total U.S. corn demand remains flat over the coming year at 13.5 billion bushels, a repeat of last year's yield - even with an increase in planted acres to 92 million - would result in a drop in corn stocks to less than 200 million bushels for the first time since 1948. A 150.7 yield, which was the national average when corn acreage last pushed above 90 million, would result ending stocks of a 20 million bushels - less than one day's usage and the lowest level of corn stocks since record keeping began in 1927.

A yield of 154.5 bushels an acre, which represents the average yield over the past five years, would generate stocks of only 321 million bushels, or roughly half the prevailing 'tight' stocks projections.

Only a yield of 159 a bushel or higher would be enough to cater to the enduring levels of consumption interest and begin to add cushioning to inventory levels - although end-year stocks would still remain below 750 million bushels. A 162.3 yield would be required to push stocks back above the psychologically key 1 billion bushel mark, while a repeat of the record 164.7 corn yield would generate 1.2 billion bushels of stocks.

In all, while high corn planted acreage totals may be widely projected at this juncture, the overall national yield will prove to be the critical component in determining the size of the overall crop come harvest. With nonthreatening growing conditions throughout the growing belt farmers can be expected to achieve something close to the recent average of around 154-155 bushels an acre. But more than that is needed if the tight stocks scenario is to be reversed. And with a 162 national yield over 92 million planted acres representing a more than 12 bushel per acre jump versus the 2007/08 yield (when planted acres last topped 90 million),a great deal of luck from Mother Nature may be required if the tight corn supply situation currently pushing prices higher is to be alleviated within the coming year.

SOY YIELDS ALSO FACE THREATS

The soybean crop also tends to suffer yield drag whenever planted acreage area spans beyond the heart of the Corn Belt and into the Delta region and fringes of the Midwest, as is expected in 2011. The national soybean yield also suffers whenever there is a significant amount of 'double crop' soybeans planted, which are soybean plantings that immediately follow another crop such as winter wheat, and are thus planted in tired soil that has been recently been depleted of key nutrients.

Given the year-over-year jump in winter wheat plantings in 2010, especially in parts of the Eastern Corn Belt that traditionally also grow corn and soybeans, a substantial number of winter wheat fields are expected to be sowed with second-crop soybeans this year - to the potential detriment of the national yield total. Obviously these double-crop fields generate some tonnages of crop by the end of the season, but it is wrong to consider those acres as having the equivalent productive potential as fields that have been left idle since last fall and will be dedicated to full-season soybean varieties.

The soy crop also faces fierce completion for acres across the Delta region from cotton, which has recently scaled alltime price highs due to low global inventories and strong demand.

Should the soy crop lose some marginal acreage to cotton in that region, the national yield has the potential to favor the upside as long as the rest of its foothold resides in the heart of the Corn Belt. But given the high degree of doublecrop acres expected in parts of Illinois, Arkansas and Missouri, the total soybean yield may still struggle to push past recent highs in the 44-45 bushels-an-acre vicinity.

In all, the much ballyhooed tussle over planted acreage may only be the prologue to the 2011 crop production saga, as the final determinant of total crop size will be the average national yield of each crop. The fact that total spring crop planted area looks set to stray beyond the core productive fields of the Corn Belt and into fringe areas of the Midwest, the Delta and the Northern Plains will greatly complicate yield assessment attempts this year, and likely make crop size estimates a guessing game right up until harvest.

But if the current trend of declining crop inventories is to be reversed, it is essential for every acre of productive land to maximize its potential during the coming growing season, and to have ideal growing conditions nearly every step of the way.

(Source: http://www.commodities-now.com/reports/agriculture-and-softs/5284-yield-trumps-acres-for-2011-corn-a-soy-crops.html)