Do Big Crops Get Bigger?
It seems like almost everyone associated with the market believes the old adage that, "big crops get bigger and small crops get smaller." I think belief in that old saying explains most of why the reaction in the corn futures market today was so small in the face of what should have been very bullish news from the USDA crop report. So, it could be pretty important to know whether this adage really should be used to heavily discount today's USDA yield estimate. Darrel Good, myself, and a former post-doc researcher, Olga Isengeldina, wrote a paper on this exact topic that can be found here(free access!): http://ageconsearch.umn.edu/handle/143639.
A quick summary:
1. Looking back from the vantage point of the January estimate each year from 1970-2010 there is indeed a tendency for what turn out to be big crops to get bigger from August through the final January estimate. However, this is an ex post analysis that uses information not available in August each year.
2. A different question is whether one can predict future changes in USDA yield estimates using only data available each August. This a true predictive or ex ante exercise (what you have to conduct in order to trade). In other words, not knowing whether the final yield estimate really does turn out to be "big" or "small" can you reliably predict the direction and magnitude of future changes to USDA yield forecasts? At least based on the tests we ran using forecast trend deviations and crop conditions ratings, the answer is an unequivocal no.
3. We concluded that the widespread belief in the adage "big crops get bigger and small crops get smaller" is based on a hindsight bias, and in fact, it is very difficult to predict in real-time.
The bottom-line is that our research suggests that today's USDA corn yield forecast should be viewed as unbiased and having an equal probability of increasing or decreasing going forward.
Let the arguments begin!
University of Illinois
Re: Do Big Crops Get Bigger?
Some of the best looking crops they've had in years in northern ks and eastern nebraska in areas cooked.
Going by Milo fields that have scorched top leaves.
They looked to be excellent till they cooked out in the end of July
Re: Do Big Crops Get Bigger?
I skimmed but did not study the referenced paper. I'm not sure I understand it.
A couple of reactions.
If big crops get bigger, obverse small, it it works out most years, than who cares if you can predict or explain it? Most people don't know why the sun rises in the east but make decisions based on it.
A casual impression would be that whatever factors joined to make a crop big or small may only be partially accounted for and forecast at any one time. Thus, whatever made a crop look good in August is probably still continuing and the crop will likely look even better in September. Farmers are forever griping that USDA forecasts are a month old and don't account for more recent growing factors such as heat, rain or disease. Thus, farrmers arlready anticipate that forecasts have a built in inertial and sometimes resist it.
Why do I care if a crop gets bigger or smaller? Only if I am marketing it one way or another or if it's a storage issue. Hedging is generallyt done during the spring or planting period so that part of marketing shouldn't matter. Cash sales are the only things that are affected by the big crop small crop question. Since I store my own grain, I look at the carry, If there is enough carry I will hedge sell the crop for future delivery. If there is no carry I look to marketing based on cash flow needs and small market moves, or, as in the case of soybeans, river close and open.
This kind of question exemplifies to me the smudging of the lines between producers, processors and traders. I'm not sure that producers and processors should be in a position that this makes a bid difference. They should be hedged up. Traders and speculators looking to discern a market bias may be more interested in the size of the crop more than the other actors.
What do you think?