The USDA’s August Crop Production report forecast the 2014 U.S. average corn yield at 167.4 bushels per acre. That exceeds the previous record yield of 164.7 bushels in 2009. The market expectation is that yields will increase in future USDA reports in September and October. Reports from the crop tour this week seem to support that assumption. In years when the final yield estimate is well above trend, the USDA forecast of the average yield tends to increase from August forward. Recent research by University of Illinois ag economists Scott Irwin and Darrel Good documents this tendency in USDA corn and soybean forecasts. However, these same authors argue that the shortcoming of this type of analysis is that it is backward-looking.
Specifically, the analysis starts by identifying years when the final yield estimate (typically January) is well above an in-sample calculation of trend and then traces the pattern of yield forecasts from August through the final estimate in January after harvest. That analysis can be more aptly identified as answering the question “did big crops get bigger.” Irwin and Good go on to analyze whether crops that are expected to be big actually get bigger.
They identify years when the August USDA forecast is large relative to an out-of-sample trend yield estimate and then test whether forecast changes in following USDA Crop Production reports (September, October, November, and January) can be predicted based on the trend-deviation of the August forecast. Very little evidence for either corn or soybeans is found that “big crops get bigger” (or “small crops get smaller”) based on this forward-looking analysis. The authors conclude that, “…this bias may appear obvious to market analysts in hindsight but it is difficult to anticipate.”
History suggests that the September forecast will give some indication of the direction of change in yield forecasts from August to January, but will not provide much insight on the possible magnitude of change. Many analysts are on record anticipating that the final yield estimate will be well above the August forecast of 167.4 bushels, and it appears that the corn market is trading a much higher yield. Much of the expected yield increase is based on the concept that “big crops get bigger,” with support also coming from relatively high crop condition ratings late in the season.
The U of I analysis however, reveals that:
1) historically, not all big crops get bigger
2) weather conditions through July were not completely consistent with an average corn yield that has one of the highest positive deviations from trend
3) average August temperatures this year may not be consistent with a large increase in the USDA yield forecast from August to January.
These results do not imply that the U.S. average corn yield this year will not be large and will not increase, only that such outcomes would be highly unique given the nature of the growing season.