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Grains blast higher on drought

07/09/2012 @ 8:47am

This marked the third week in a row that grain prices surged higher, responding to intense drought conditions in the Midwest and quickly deteriorating crop conditions across most of the major growing regions. Since mid-June, Chicago wheat rallied 2.16, Kansas City 1.99, Minneapolis 1.97, corn 2.05 and soybeans 2.34.

The corn crop is the hardest hit, particularly with the early plantings, as pollination across much of the nation is occurring during this intense heat. Average yields are dropping daily and production estimates are quickly approaching levels that require serious rationing. 

The rationing does appear to be underway with several ethanol plants shutting down and corn export sales abysmal for the last few weeks. The wheat and corn markets have seen a number of cancellations from countries who had offered tenders but experienced sticker shock when the offers were presented. It seems the only country not slowing down on purchases is China, who booked over a million tons of soybeans this week. They have no intention of just standing by and watching supplies get away from them. 

Informa released their latest yield estimates on Friday, taking corn down to 153.5 bu/acre, down 1.4 from their latest estimate. USDA’s last month estimate was 166.0. Total corn production was projected to be 13.64 billion bushels, down 1.15 billion from USDA’s last estimate.

Informa also lowered soybean yields slightly to 42.0, down just .7. Production is projected at 3.161 billion bushels, down 44 million from USDA.

All wheat production was estimated by Informa to be 2.287 billion bushels, up 53 million from USDA.

USDA will release their updated estimates on Wednesday, July 11. Most in the trade expect only slight reductions in yield for corn, and we may not see any yet for soybeans.

Wheat markets have been just as robust as corn, even though they don’t get much of the headlines. Understandably, the focus is on corn and beans as the weather wreaks havoc but wheat has a few bullish fundamentals in its camp as well.

Production losses in China and the Black Sea region have whittled world supplies lower. Exports out of both Ukraine and Russia will be sharply lower from last year. Now with wheat clearly headed for another year of feed grain usage, it looks like US and world stocks will continue to decline, which should support prices for the next year.

That said, those price targets might be reached much sooner than a year down the road. Indeed, in weather markets the rallies tend to be very fast – and big. While it’s difficult, it’s important to stay ahead of the market in these kinds of trading environments. 

For sellers, it’s always a good idea to have orders in place well ahead of time, and don’t be afraid to shoot for price levels that seem way up there – in weather markets prices can go way further than you’d expect. These kinds of markets are also volatile; one day sharply higher and the next giving much of it back on any hint of improving weather – like we saw on Friday.

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