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Published August 14, 2014, 11:09 AM

US soybean yields have more upside risk than corn

The latest crop yield updates from the U.S. Department of Agriculture came in largely in line with analyst expectations, and confirmed that American growers are on course to haul in record-large harvests of both corn and soybeans this fall.

By: Gavin Maguire, Reuters

The latest crop yield updates from the U.S. Department of Agriculture came in largely in line with analyst expectations, and confirmed that American growers are on course to haul in record-large harvests of both corn and soybeans this fall.

But while USDA surveyors saw fit to confirm that corn yields are likely to score a record across a slew of key growing areas thanks to friendly growing conditions so far this season, they held off from lifting soybean yields to similar heights because of the fact that weather conditions through the remainder of August still have a major role to play in determining productive potential.

But this somewhat restrained approach to projecting U.S. soybean yields thus far means there is potentially greater risk of an upward revision to soybean yields than corn yields in upcoming crop reports. This means bearish pressure might build in the soybean market at a faster pace than in corn at the tail end of the growing season, and encourage a pick-up in long corn/short soybean positioning by traders.

Slow going

USDA forecasters took a fairly conservative approach to adjusting yield projections for both corn and soybeans in the August crop report, with the government’s projections coming in below the average estimate of industry analysts by nearly 2.7 bushels an acre in corn and 0.18 bushels an acre for soybeans.

The chief reason for this undershoot in yield estimates is that the data used by USDA to formulate its assessments were as of Aug. 1, and so still ahead of the final phases of the growing season when a large proportion of critical crop development is set to occur.

Nonetheless, USDA saw fit to lift its national corn yield projection by more than two bushels an acre from its previous estimate, and by more than 2.7 bushels an acre above the previous all-time high — and so clearly view the 2014 corn crop as being in a very healthy state.

This was particularly evident in the top growing states of Iowa, Illinois and Indiana, where corn yield projections handily surpassed the previous record and helped justify the confidence in the national yield record.

Cautious but confident

USDA took a more cautious approach to its soybean yield projection because a greater portion of the soybean growing season is still ahead relative to corn, and so weather conditions in the month of August can have a larger impact on soy yields than corn yields.

Still, as it stands the August soybean yield estimate would mark a new record, and so USDA clearly has been impressed by the state of the crop even before it has finished growing.

Yet across the top growing states, only Illinois is so far expected to register a record yield in 2014, with all other major states projected to average slightly below record yields.

With such an important amount of production still to unfold in those crops, the cautiously confident approach to yield projections was sensible and widely predicted by the marketplace.

Yet the very fact that soybean yields across most of the top growing regions have upside room does pose a risk to soybean market prices, especially in the immediate wake of any such upward revision by USDA.

Trades already under way

The next crop report is due Sept. 11, by which point USDA crop assessors should be able to project the soy crop’s overall potential with greater confidence. And if weather conditions remain broadly nonthreatening until that point, USDA will likely feel inclined to boost yields across many areas in that assessment.

If at the same time USDA opts to hold corn yields flat, or raise them by a lesser degree, price pressure could well build aggressively in the soybean market relative to corn, and set the stage for corn prices to outperform soybean prices for a spell.

Corn prices have already outperformed soybean prices in recent sessions, with the December corn — November soybean spread rallying from negative $7 a bushel just before the latest report to roughly negative $6.77.

But even after that modest gain corn prices remain at their largest ever discount to new crop soybeans for this time of year. What’s more, corn prices have shown a tendency to advance on soybeans during the month of September, having narrowed the new crop corn-soybean spread from early to late September in four of the past five years.

This means that even though corn has gained on soybeans already in recent days, a much greater contraction in the price spread between those two commodities could well unfold over the coming month.