Click here for larger picture of Fig. 1. 
CORN
By Craig Solberg
Our August Outlook for the Corn Belt (more 100 degree heat) verified to a "tee", which meant the weather conditions this past month were not particularly conducive in some areas for corn and soybean development. 100 degree temperatures were felt this past month at places like Lincoln, NE; Sioux Falls, SD, St. Louis, MO; and Evansville, IN. While the rest of the Corn Belt suffered through high temperatures "only" in the 90s, the entire belt has just finished one of its warmest Augusts on record. How can this be if widespread 100 degree heat was not felt over the Corn Belt? Consistently we saw overnight lows in the 70s (and occasionally a few low 80s) during August, which for most areas is 10-15 degrees above normal levels. (We'll discuss the possible implications of these warm overnight lows later in this article). Add this to consistent daytime highs of 5-10 degrees above normal, and you have the makings of one VERY warm month in the Corn Belt (see figure #1). While official data was not available as we went to press this month, we do know that Des Moines, IA will end August with temperatures over 4 degrees above normal. That has happened just 10 other times this century. We'll use this fact as a part of our analog study this month.
Click here for larger picture of Fig. 1.
As was the case during July, precipitation was highly variable across the Corn Belt during August (see figure #2). In general though rainfall was most widespread in early August, with all but the far western and far northern Corn Belt seeing mostly dry weather after August 18th. This combination of dryness AND above normal temperatures caused crop ratings to fall rather sharply during the last week of August. By the end of the month though both corn and soybean ratings were slightly higher than late July levels.
Click here for larger picture of Fig. 2.
An area of the U.S. that did not draw a lot of market attention, but probably suffered worse than the Corn Belt, was the Delta. (Considering that Arkansas is one of the top ten soybean producing states, one would have thought this would have been more of a market factor). While sporadic rains did fall in the Corn Belt during August, much of the Delta was bone dry...with portions even missing the rain from the remnants of Hurricane Erin! IN FACT, LITTLE ROCK, AR RECEIVED JUST A TRACE OF RAINFALL THIS PAST MONTH. Agronomists in Arkansas put their soybean crop potential at no more than 24 bu/ac (versus the current USDA forecast of 33 bu/ac). Mississippi agronomists put their soybean yield at 26-
28 ub/ac versus USDA forecasts of a state yield of 31 bu/ac.
Because of the fact that this year's crops are late in maturing (because of delayed plantings this past spring), we will need to see the first killing frost hold off until sometime in October to insure that all of the crop makes it to maturity. In last month's issue of Trade Winds, we stated that 14 of last month's 21 analog years had a frost at some time during September in some portion of the Corn Belt. Since that was the same study that accurately predicted the August heat wave for the Corn Belt, we want to continue to use it again this month, but are revising it to include recent weather developments. In addition, because this past August was SO warm in the Corn Belt, we want to include some years that were record warm in August (disregarding for the time being anything that happened prior to August).
Click here for larger picture of Fig. 3.
Our list of 21 analog years last month included 6 that either did not record any record highs in August or did not record heat for August as a whole. We are thus left with 15 years, and they are listed in figure #3. As we stated earlier in this article, there have been just 10 other years this century in which Des Moines has had August temperatures at least 4 degrees above normal. They too are listed in figure #3. We are thus left with a list of 19 years -- 9 that we used last month, 4 that match the criteria for Des Moines, and 6 that match BOTH criteria (i.e. very warm July/August in the Corn Belt AND August temperatures 4 degrees above normal in Des Moines). NOTE THAT THESE YEARS SUGGEST THE ODDS OF EARLY FROST IN THE CORN BELT ARE STILL RELATIVELY HIGH. 14 of the 19 years recorded a September frost in the Corn Belt, or just under three-fourths of the time. WE'LL THUS PUT THE ODDS OF 32 DEGREE TEMPERATURES APPEARING IN SOME PORTION OF THE CORN BELT AT SOME POINT THIS MONTH AT ABOUT 70%. Our above criteria for forecast verification would say that, if Sioux Falls, SD reached 32 degrees our forecast would verify. While this may be significant from a meteorological standpoint, it obviously would cause very minimal crop loss. Thus, it might be best to find out what the odds of a SEVERE (i.e. crop- killing) frost might be. Figure #4 again lists our analog years, their frost severity, and some notable low temperatures when available. WHILE 14 YEARS HAD FROST, PROBABLY ONLY ABOUT 4 OF THEM WERE COLD ENOUGH AND WIDESPREAD ENOUGH TO CAUSE ANY CROP DAMAGE. Thus, while the chance of a frost this month may be about 3 in 4, the odds of a KILLING (i.e. market-impacting) frost might be only slight greater than about 1 in 5. CONCLUSION...Look for at least a major frost scare this month for the Corn Belt, with the odds favoring some spot in the Corn Belt reaching the 32 degree mark. The odds of a widespread killing frost occurring before October 1 though are only about 20-25%.
Click here for larger picture of Fig. 4.
While it is one thing to talk about an early freeze, it is another to start talking about how much damage that freeze might cause. Agronomists have determined that it takes about 60 days for corn to reach maturity after the time it starts to silk. For soybeans, it takes about 51 days after the plant starts to set pods before it reaches maturity. With the weekly release of the USDA crop progress numbers, one can use the data to project how much of the crop will be vulnerable to freezing temperatures on certain dates. Figure #5 shows how much of the corn was not silking and beans not podding at various times during the past few weeks. It also projects the amount of corn and soybeans that would be vulnerable to a frost at various times in late September and early October based on the silking and podding dates. The figure shows that crops in Nebraska and South Dakota are generally the slowest in maturing right now. FROM A CLIMATOLOGICAL STANDPOINT, THOSE ARE GENERALLY THE FIRST TWO STATES IN THE CORN BELT EACH FALL TO SEE FREEZING TEMPERATURES. Note that even if the first frost held off until October 5-10, about one-third of the crops in those two states would still be vulnerable. Figure #6 totals the amount of corn and soybeans that would be vulnerable in the states listed on the various dates, and the percentage of the total U.S. crop that would be vulnerable. Note that a freeze that held off even until EARLY OCTOBER would still put 10% of the U.S. corn and soybeans at risk to frost.
Click here for larger picture of Fig. 5.
There will be some combines that get into the fields this month, but as late as the crops are this year the bulk of the harvesting will take place in October. Looking back at figure #3 shows that the majority of our analog years had rather wet weather in October. This would especially be the case for 1941, 1954, and 1959, years that probably had the wettest October weather ever seen in the Corn Belt. FARMERS SHOULD EXPECT A SLOW GO OF IT THIS FALL FOR HARVESTING.
Click here for larger picture of Fig. 6.
The USDA gave corn and soybean traders a real shock with their production numbers in the August USDA crop report, but the trade then spent the rest of August trying to make a case that the USDA numbers were far too large. At the time of this writing, their case appeared to be rather strong...particularly in the case of corn.
The August USDA crop report put U.S. corn production at 8.122 billion bushels on a yield of 125.6 bu/ac. This figure came in higher than all but the highest pre-report trade guesses, and was nowhere close to our own estimate of a 7.751 billion bushel crop. It was not long though before the trade started to seriously question the USDA number. The widely respected Pro Farmer crop tour got underway in mid-August, a tour that did crop surveys in the major corn producing areas of Ohio, Indiana, Illinois, Minnesota, and Iowa. In the end, the tour came up with an average U.S. corn yield of 120.5 bu/ac, or just over 5 bu/ac less than the August USDA number. Interestingly enough, analysts with Pro Farmer went so far as to state that final production could fall below 7.6 billion bushels if dry weather, disease and other factors made their presence felt in a greater fashion.
For the first time since possibly the infamous corn blight of 1970, a disease outbreak is threatening to cause significant crop losses for this year's corn crop. Gray Leaf Spot (GLS) disease was introduced to the trade in early August in a Wall Street Journal article, and has not left traders' minds since. Widespread use of minimum tillage practices, a warm 1994/95 winter, a wet spring, and hot and humid conditions this summer have let GLS infections flourish, meaning that growing conditions seen for most of this summer have been perfect for its development. Agronomists at Purdue University felt that very few corn fields in Indiana were NOT being affected by the disease this year; how severe it is in any given field varied greatly depending upon tillage practices, the growth stage of the crop, and the corn hybrid used. The earlier the disease appeared on the crop, the greater the loss. For example, the Purdue agronomists forecast 30% yield losses if GLS was present on all leaves for corn in the milk stage of development. In contrast, 2-5% yield losses were expected to be encountered for corn not being affected by GLS until it reached the hard dough stage of development. Yield losses from the disease occurred primarily through shortened kernel length, reduced kernel fill and reduced test weights.
For soybeans, disease talk during this past month centered on Sudden Death Syndrome, caused by a strain of the bacteria fusarium oxysporium. In affected fields this disease has been known to cause catastrophic losses. However, analysts were rather quick to agree that its affect should not be all that great in terms of national soybean production. In general single farmers many times suffer significant losses, but the disease has never been widespread (and is not expected to be widespread this year). Somewhat greater concern was expressed among traders concerning August's warm overnight lows in the Corn Belt. Some analysts believed these warm temps inhibited soybean plant respiration, which in turn would reduce the numbers of soybeans in each pod and the size of the individual soybeans themselves. (Some analysts also worried about the warm nights' affect on corn yields. Some agronomists believe warm temperatures at night cause greater use of carbohydrates for cell function, carbohydrates that instead could have made their way into corn kernels as yield).
WE LOOK FOR THE USDA TO CUT THE SIZE OF THE U.S. CORN CROP, IF NOT IN THE SEPTEMBER CROP REPORT THEN IN FUTURE REPORTS. Our specific number: 7.662 billion bushels (or under even our August estimate). AT THIS POINT WE DO NOT STRONGLY DISAGREE WITH THE USDA SOYBEAN PRODUCTION ESTIMATE, BUT REALIZE THAT IT HAS A CHANCE AT FALLING AS WELL DUE TO HOW HOT IT WAS IN AUGUST. We look for U.S. soybean production of 2.239 billion bushels, or just below the August USDA estimate.
Brazilian soybean farmers seem to be on a course to sow far fewer soybean acres for the 1995/96 crop year. For example, growers in the state of Mato Grosso (Brazil's second leading producing state this past year) may see up to a 35% drop in planted area due to struggles with big debts and a cut in government aid. In Rio Grande do Sul (Brazil's largest producing state) cooperatives are no longer supplying seeds and fertilizers in exchange for a portion of the future crop. Currently, much of the major soybean growing area in Argentina and Brazil is quite dry. We'll have more details on the South American soybean outlook, along with long range weather forecasts, starting in our October issue of Trade Winds.
We can envision two different scenarios that are most likely to occur in corn and soybeans over the next two months...both of which would be bullish. Scenario One is that there is a September frost and a lot of rain during the harvest in October. This is obviously a bullish situation and would probably send prices soaring. Scenario Two is that we are wrong about the weather forecast, and there is neither a frost this month nor a lot of rain during October. We'd still expect prices to go higher during this situation, only more slowly than during Scenario One. Why would prices still go higher? Because we are quite confident that the USDA will be lowering the sizes of the U.S. corn and soybean crops in future crop reports. At a time when demand is very strong, that's clearly indicative of markets still with some upside potential.
Traders exited short September $3.20 corn calls in early August for a profit of around $200/contract. Due to a typographical error, traders should also now be long September corn futures. Traders had been long Sept. $2.70 calls and we wanted to have traders lift those positions before they expired. Instead, it looks like those $2.70 calls were exercised on August 18th, making traders long Sept. corn futures from $2.70 (net $2.82, since the call option was purchased at a cost of 12 cents) and ahead about $700 as of this writing. Exit long Sept. futures immediately, and buy December futures. Place stops on this position at $2.82. Raise stops to $2.89 on a move above $3.00 in December futures. Make the objective on this position $3.15.
Traders are now long November $6.25 calls and short November $6.75 calls and are ahead about $200. Lift the short $6.75 call this month, and just stay long the $6.25 call. Take profits on this position on a move to $6.70 in November futures.
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