Monday, June 5, 2017

Ag Futures: "When Should We Start Paying Attention to Crop Condition Ratings for Corn and Soybeans?"

From the University of Illinois' FarmDoc Daily, May 24:
The USDA will report crop condition ratings for the 2017 U.S corn and soybean crops in the 18 major producing states in the weekly Crop Progress report beginning May 30 and continuing until harvest. Weekly crop condition ratings have been made for all the major producing states since 1986. Market participants typically follow the crop condition ratings closely as an indication of crop health, yield potential, and change in yield potential as the growing season proceeds (e.g., farmdoc daily, July 19, 2011; August 4, 2011; September 9, 2011; July 14, 2016). Recent research documents that these ratings indeed have a substantial market impact during the growing season (Lehecka, 2014). In a farmdoc daily article yesterday (May 23, 2017), Gary Schnitkey showed that early season crop condition ratings do not tell us much about corn yield prospects in Illinois. This naturally leads to the question of when do condition ratings provide useful information about potential yields. In this article, we examine the relationship between crop condition ratings at various times in the growing season and the U.S. average yield of corn and soybeans in order to determine when we should pay serious attention to the ratings.

We start with a brief description of the condition ratings and the procedure for developing those ratings. Our discussion draws mainly from the procedure for surveying crop condition ratings and making crop condition ratings as described in the May 22, 2017 Crop Progress report. For both corn and soybeans, conditions are reported as the percentage of the crop rated to be in one of five categories, described as follows:
  • Very Poor - Extreme degree of loss to yield potential, complete or near crop failure. Pastures provide very little or no feed considering the time of year. Supplemental feeding is required to maintain livestock condition.
  • Poor - Heavy degree of loss to yield potential which can be caused by excess soil moisture, drought, disease, etc. Pastures are providing only marginal feed for the current time of year. Some supplemental feeding is required to maintain livestock condition.
  • Fair - Less than normal crop condition. Yield loss is a possibility but the extent is unknown. Pastures are providing generally adequate feed but still less than normal for the time of year.
  • Good - Yield prospects are normal. Moisture levels are adequate and disease, insect damage, and weed pressures are minor. Pastures are providing adequate feed supplies for the current time of year.
  • Excellent - Yield prospects are above normal. Crops are experiencing little or no stress. Disease, insect damage, and weed pressures are insignificant. Pastures are supplying feed in excess of what is normally expected at the current time of year.
The percentages in each of the five categories must sum to 100. For example, the 18-state corn condition ratings on August 1, 2016 were 1 percent very poor, 5 percent poor, 18 percent fair, 56 percent good, and 20 percent excellent. National crop planting progress, progress of development stages, and condition estimates are weighted using the program State's average planted acres over the previous three crop years.

As described in the May 22, 2017 Crop Progress report, progress and condition estimates are based on survey data collected each week from early April through the end of November. The non-probability crop progress and condition surveys include input from approximately 3,600 respondents whose occupations provide them opportunities to make visual observations and frequently bring them in contact with farmers in their counties. While NASS does not provide data on the composition of respondents, it is our understanding that in earlier years the vast majority were county agricultural extension agents, but as the number of agents declined over time they were replaced by others, such as Farm Service Agency staff and elevator managers. Based on standard definitions, these respondents subjectively estimate the progress of crops through various stages of development, as well as the progress of producer activities. They also provide subjective evaluations of crop conditions when the crops are mature enough to make such evaluations.

The way in which weekly crop condition ratings are used to judge corn and soybean yield potential likely varies considerably. However, it is common to use the combined percentage of the crop rated good (yield prospects are normal) and excellent (yield prospects are above normal) at any point in the growing season to quantify average yield expectations. It should be expected that the relationship between yield (adjusted for trend) and the combined percentage of the crop rated in good and excellent condition would be the strongest at the end of the growing season when uncertainty about growing conditions has been largely resolved. That relationship for the period 1986 through 2016 is presented in Figure 1 for corn and Figure 2 for soybeans. The percentage of the crop rated good or excellent in the final report of the year explained nearly 85 percent of the annual variation in the trend-adjusted U.S. average corn yield and about 71 percent of the variation in soybean yields. Both corn and soybean yields are adjusted to 2017 technology using linear trends for 1986-2016. That strong relationship explains why market participants follow crop condition ratings closely to judge yield potential. However, from a practical point of view, waiting for the final crop condition rating of the season to form yield expectations is not particularly valuable. The question, then, is whether crop condition ratings earlier in the growing season provide useful information for forming yield expectations?