There are few words more dangerous in the world of financial markets than to suggest that one has permanently entered into a ‘new normal’. However, when it comes to crop yields this may truly be the case.
This week USDA came out with their monthly supply and demand update both for the U.S. and globally. Every report generates a certain amount of market interest as traders zero in on the latest official figures and fine tune their balance sheets, all in an effort to determine where values might go in the coming weeks and months. The latest report was no different.
However, in some ways this report was also interesting from a 30,000 foot perspective as well. USDA estimated the corn yield at 171.8 bushels per acre, which was above what the market was anticipating, although down from last year’s record yield of 174.6 bushels per acre. What is fascinating is the level of production that U.S. farmers were able to achieve despite a year of imperfections across many of the key growing regions, including dryness in the west and too much rain through chunks of the eastern U.S. Certainly the weather wasn’t setting up for a ‘wreck’, but conditions were far from last year’s Garden of Eden that set the new high bar. But yields slipped less than 2 percent.
In fact, each of the past four years have provided yields right around the 170 bushel per acre range. This makes a 171.8 bushel per acres yield seem almost ordinary. But until four years ago each of these years would have been a new record-high yield by far. In fact, the pre-2014 record was set in 2009 at 164.4 bushels per acre – most other years around that were in the upper 140s to lower 150s. In other words, the past four years appear to have set a new permanently higher plateau.
A similar story can be seen in soybeans, even if not quite as dramatic. The last USDA yield of 49.5 bushels per acre is below last year’s record of 52 bushels per acre, but once again each of the past four years would easily have been a record in any year prior.
The pattern is very much the same in canola, although not quite as pronounced. The 2017 yield may see a bit of a bigger relative drop from last year’s record than that of corn and soybeans, and there is a bit more variability around the trend. But the path toward consistently higher yields for canola is unmistakable as the crop has proven over and over again to be incredibly resilient in the face of weather adversity.
There are multiple factors that play into this. For sure, we have not seen the kind of epic, widespread drought that could devastate a crop (although local areas have been hard hit). But yields have been remarkably stable even when seeing less than ideal conditions. Crop genetics have improved, as have other technological advances in everything from equipment to precision farming. Improved efficiencies and the wide dissemination of best practices also have contributing roles. Simply put, the industry as a whole has worked together to drive yields to a higher level. As a result, the phrase ‘weather market’ doesn’t seem to strike the same fear into the markets that it once did.