In today’s computer based world, we are inundated with information. There are statistics for every possible thing that you could chose to measure, and the agricultural markets are no exception. In the next few weeks, there will be a series of reports outlining the North American farmer’s planting intentions for the 2013 crop (the most significant of these being the USDA’s release on March 29), and then multiple calculations regarding potential supply and demand models which might reflect the impact of these planting intentions on the grain markets. These reports will set the stage for the grain markets for a big portion of the next marketing year. The problem with all of this information is that much of the market lacks the knowledge to make effective use of it.
Information needs to be filtered through common sense and experience. One of the currently troubling statistics being thrown around in the Ontario agricultural market is the fact that Ontario farmers have ordered 7% more corn seed for the spring of 2013 than they did for the spring of 2012. While I won’t contest the fact, (a lot of farmers needed some expenses at the end of 2012 for tax reasons, and the early order / early pay discounts were attractive), but if we increase by 7% over 2012’s Ontario corn crop of 2.3 million acres, we’ll need another 161,000 corn acres to bring the provincial total to 2.461 million. It’s still not a problematic statistic, until you consider that this past fall Ontario farmers also planted 200,000 acres more winter wheat than they did in the previous year (rising from 750,000 acres in the fall of 2011 to 950,000 acres in the fall of 2012). If there is 200,000 acres more winter wheat and 161,000 acres more corn, where is this 361,000 acres that we didn’t have in 2012? That’s a land re-distribution about the size of Prince Edward Island.
Ontario has certainly torn up a great deal of hay and pasture land over the past 8 years. We could also plant significantly fewer acres of soybeans this coming spring. However, the most likely explanation for the increase in corn seed sales was the farmer’s need to create cash expenses at the end of a year of record high grain prices. Perhaps there will be fewer spot sales of corn seed in the spring to balance things out. The information says that we’re looking at 7% more corn being planted in Ontario in the spring of 2013, but the knowledge suggests that it’s likely only about half of that.
Where the gaps between the pure information and world knowledge are of most concern are the big projections made on U.S. market information and the impact that those projections have on our prices. For example, the 2013 crop corn market has come under a great deal of pressure ever since the December Informa Report estimated the coming year’s corn planting would reach 99 million acres. The fact is that a projected corn acreage that is 3% bigger than the previous record, and 13% bigger than the 10-year average is widely accepted if purely information. It’s less aggressive than the Ontario farmer’s winter time planting intentions, and there are acreage reductions in cotton, forage crops, and the land set-aside which would certainly allow for this many acres to be seeded to corn.
Where the modeling falls down is on the assumption that increased acreages can still support trend line yields. Since the ethanol boom occurred in 2007 – 2008 corn acreage has risen year over year from 78 million acres up to last year’s 96 million acre crop. The chart below shows the average corn yield in the United States over the past 23 years, and as you can clearly observe, as the acreage rises, the yield gains suffer.
Any of us who have actually grown much corn, know that as you push to bigger acres, you’ll need to spread out into areas less agronomically adapted to corn. Even setting aside the drought of 2012, the average corn yield in the United States declined in 2010 and 2011 as the planted acres rose from 88 million to over 90 million acres. The reality of the situation is that these new corn acres coming out of cotton, pasture, and the land set aside program are not capable of producing record corn crops, so when you see 2013 crop corn supply and demand projections that are built on 162 or 164 bushel per acre average yields, they were created with just a little information and not very much knowledge.
The 2013 US corn crop should come in just slightly under 14 billion bushels. (98 million acres planted, 92 million acres harvested, with an average yield of 152 bu/ac). The analysts who are building models around 162 – 164 bu yields are accounting for a billion bushels of corn that will never exist. That’s being wrong to the tune of three years’ worth of Ontario’s entire production, so it’s not a small rounding error. The problem is that some of these ill-conceived projections are published and they are having a detrimental effect on new crop values.
As you see the series of 2013 planting intention reports and grain supply and demand reports due out over the next three weeks, let’s be careful to use a little knowledge in order to filter all of the information.