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Do Big Corn Crops Always Get Bigger?

Do Big Corn Crops Always Get Bigger?

21 August 2014

US - The USDA's August Crop Production report forecast the 2014 U.S. average corn yield at 167.4 bushels per acre, writes Scott Irwin, Darrel Good, and John Newton.

That exceeds the previous record yield of 164.7 bushels in 2009 and is 7.4 bushels above our calculation of the 2014 (unconditional) trend yield based on actual yields from 1960 through 2013.

The forecast was smaller than expected, but this seemingly bullish news was shrugged off by the market.

Comments by traders and market analysts indicate there is a widespread expectation that the forecast will increase in subsequent Crop Production reports.

This would explain the weak reaction of market prices to the release of the August report.

There is an old market saying that "big crops get bigger" and this appears to be the basis for the expectation that USDA corn yield forecasts will increase in subsequent Crop Production reports.

That is, 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 Isengildina, Irwin and 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." Isengildina, Irwin, and Good go on to analyze whether crops that are expected to be big actually get bigger, or "do big crops get bigger."

Specifically, 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 and the authors conclude that, "...this bias may appear obvious to market analysts in hindsight but it is difficult to anticipate."

Further Reading

You can view the full report by clicking here.

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