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Wednesday, July 29, 2015

The CommStock Report

Friday, October 26, 2012

(Photo)
David Kruse, president of CommStock Investments, Inc.
Former GE retired CEO and corporate icon, Jack Welch, tweeted in response to the Oct. 4 unemployment numbers, "Unbelievable jobs numbers! These Chicago guys will do anything! Can't debate, so change numbers!" Jack couldn't produce any evidence that the employment numbers were manipulated. When you cast aspersions and can't produce any fish you quickly get washed up.

I see more evidence of recovering employment than either side of the political debate will admit to. If Obama touts improving jobs numbers then it sounds like he is insensitive to those still unemployed and struggling, so he has to handicap everything he says. Romney can find every dark lining in a brightening skyline, describing the current economy as if it is in recession when it is not. The current economic recovery can only be compared to the one following the Great Depression and contrary to what Mitt says, this one is one heck of a lot better economic recovery than occurred in the 1930s. Such judgments require proper perspective.

I have my own government conspiracy that I want to share with you.

Let's cast an aspersion of our own and see if there are any fish out there. My conspiracy theory is that the USDA methodology for compiling harvested acreage data baked into crop reports benefits end-users by overstating corn production. USDA reported this month that harvested acreage was 90.48 percent of planted acreage despite the drought. Harvested acres were less than 88 percent of planted acres in the 2002 drought, and 86 percent or less in the 1993 floods, 1988 drought and 1983 drought. USDA is saying that despite the worst drought since the dust bowl that the 2012 harvested versus planted acreage ratio eclipsed past historical events.

I remember 1993 very well. It was the year without a summer with a 0/92 program to reduce harvested acreage. Farmers knew that the crops were terrible but USDA didn't admit to the reality until the November crop report in 1993. The result was that farmers became discouraged and sold crops before the November report, thinking production was not as bad as it was and end-users got another month to steal inventory at significantly lower prices than what they would had the truth about production been revealed earlier.

One of my subscribers wrote about what many others have told me about this corn crop. "Have you seen any of the corn fields around the Midwest that yielded only 40 to 60 bushel? Ears that yield 10, 20, 40, and even 60 bpa have a tendency to slip through the stripper plates on a corn head. I'm guessing I lost 5-10 bushels an acre in lost ears and ears being shelled at the head. I bet when it is all said and done we are missing another 100-200 million bushels. That takes carryout below a half billion bushel or less."

Harvested acreage versus planted acreage is only 92 percent in an average year without a drought. Deducting just 1.5 percent from normal harvested acreage to arrive at the 90.48 percent, about 1.3 million acres, for extra silage and baled acres due to the worst drought in decades, appears understated. Crop insurance coverage may have increased harvested acreage but if it doesn't cover harvesting costs to combine it, why would farmers do it? If they did, like the subscriber describing field losses, the average yield will come down further.

Farmers buy revenue crop insurance to cover a set amount of guaranteed bushels and the price per bushel they get paid is based on either the higher of the average price for December futures in February or October depending on the option they took. We recommended to all our insurance clients to take the harvest price option. Revenue insurance is then based upon the average price of December corn during the month of October.

If, as in 1993, the USDA reduces its production estimate further in the subsequent reports and the corn market responds accordingly it will do insurance holders no good because the price set for lost bushels was the average price for October. This benefits crop insurance companies and government underwriters who will pay farmers lower claim settlements as a result of the timing and its impact on the market.

I don't believe that we have got the last word from USDA on drought damage to the 2012 crop. I am going to keep my line in the water as the current USDA numbers are still fishy. I can't look any more foolish than Jack Welch.

David Kruse is president of CommStock Investments, Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet. CommStock Investments is a registered CTA, as well as an introducing brokerage.



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