FORT COLLINS, Colo. (Reuters) - Based on the way that condition scores are formulated and the record-slow crop progress, the agriculture market may be at risk of low-balling the health of the U.S. corn crop when the government publishes its first assessment on Monday.
The second risk involved is that better-than-expected corn conditions, if realized, could push the market into complacency, potentially easing production fears just a little too much.
Market participants need to understand what the condition scores are and are not reflecting, or else they may be drawn to faulty conclusions when the U.S. Department of Agriculture releases the first scores on Monday at 3 p.m. CDT (2000 GMT).
As a rule of thumb, USDA typically publishes the first condition scores on a crop in the week after national emergence has reached 45-50%. Emergence in some states may not have reached that level yet, however, so those observers may need to make some subjective assumptions at that point based on overall conditions in their county.
The estimates are made by local agriculture experts, primarily county extension agents, with a goal of at least one report from each county. These are the same respondents that evaluate planting progress, and the condition reporting is similarly subjective based on what they are seeing and hearing.
Each week, the respondents report the approximate percentage of their county’s crop that is in excellent, good, fair, poor, and very poor condition. The agriculture market typically focuses on the total amount of crop in good and excellent condition.
It is important to understand that the observations reflect the portion of crop that has emerged, not unplanted fields, fields needing replanting, or fields on which farmers will elect to take prevented planting payments. The latter is an option when an insured crop could not be planted within the specified time frame in the insurance policy.
Given this year’s unique situation, market analysts may underestimate Monday’s corn conditions if they are under the impression that those conditions reflect the health of the entire corn crop, emerged or not, or acres not planted. Users should cross-check with Monday’s emergence progress and monitor both metrics going forward to assess how newly emerged corn may impact conditions each week.
This year, the U.S. corn crop has emerged at what is by far a record-slow pace. As of June 2, only 46% of the corn had emerged compared with a five-year average of 84%. The next slowest for the date in records back to 1999 was 73% in 2011.
This all but ensures that this year’s first condition observations will be taken on a significantly smaller portion of the crop than in previous years. By June 9, which will be the week reflected in Monday’s report, the slowest corn emergence on record is 85% in 2013.
Over the past 20 years, the corn crops with slower emergence at the beginning of June typically had lower condition scores, but these may not be good analogs due to the critically slow emergence pace in 2019. (tmsnrt.rs/2QQ05GE)
Corn condition records date back to 1986, so looking at conditions versus planting progress includes more data points. Nearly all slower planting years had much lower initial condition scores than the others, but again, emergence is the key factor, not planting. (tmsnrt.rs/2QSoiME)
Looking at the early June planting pace versus the initial condition scores might be a better indicator for the 2019 crop a little further down the road when more of it is emerged.
The 20-year average for initial corn conditions is 69% good-to-excellent, but the recent five-year average is 73%. The initial condition scores since 1986 were issued between May 17 and June 19 depending on the emergence of that year’s crop.
In 2018, the initial good-to-excellent rating was 79% and reflected the week ended May 27.
When the initial corn conditions are published each year, analysts and traders start buzzing about what that might mean for yield potential, rightly or wrongly. Condition ratings generally do a decent job in indicating crop potential, but there are some words of warning.
USDA’s agriculture statistics survey considers the crop ratings for background information, but the yield forecasts that begin in August are based on farmer surveys, objective yield surveys, and remote sensing indications. Conditions are not directly factored in to the yield estimate.
Therefore, condition scores should not necessarily be relied upon as the primary indication of yield. Analysts must consider a host of other items, particularly weather.
Market participants were somewhat irked in 2017 when condition scores seemingly did not match the eventual corn yield. The initial rating issued at the end of May of 65% good-to-excellent was considerably lower than the previous three years. Conditions topped out at 68% at the beginning of July but fell to 60% in the next five weeks.
Final yield ended up at a record 176.6 bushels per acre in 2017, nearly 4% above the long-term trend. Lower condition scores all season likely masked the favorable growing weather, but the case of 2017 seems more like the exception than the rule.
Prior to 2017, none of the other 15 years since 1986 in which initial corn conditions were below 70% featured above-trend yields. (tmsnrt.rs/2QSaFN8)
Conversely, above-average initial conditions do not always guarantee above-average yields. Of the 15 years since 1986 where initial scores were above 70%, six of them ended up with below-average yields, two of them significantly.
(The opinions expressed here are those of the author, a market analyst for Reuters.)
Editing by Matthew Lewis