Above average spring planted crops puts damper on grain rally
We have had a long and generous rally in corn and wheat this spring, with wheat prices rallying $1.70 (48%) in KC July futures. The rally started in early December at lows of $3.50 to May 23 highs over $5.20. 0
Chicago July wheat futures also rallied 93 cents from a low of $3.27 Dec. 9 (28% appreciation) to May 23, with Mnpls Sept. futures running $1.26 higher in the same time (35% rally). These are big price gains for wheat in only 6 short months!
These gains came about because winter wheat crops in the HRW states of KS, OK, and TX are a disaster. The extremely stressful winter was difficult, and while spring rains salvaged the central and eastern HRW wheat belt crop, the western 1/3 of HRW wheat country got very little spring rains. This left a disastrous crop in the far western areas of winter wheat country, with a tremendous abandonment rate and disastrous yields on what crop made it to harvest.
Corn prices have also rallied sharply from early Dec lows of $2.38 Dec'06 futures to a high of $2.85 on May 18th, a full 47-cent rally or about 20% appreciation in 6 short months. The corn rally was due to projected 2006 acreage much lower than the trade anticipated, and also the potential drought we entered spring with (leftover from the 2005 drought centered in ILL).
However, a lot of things have changed for the 2006 spring-planted crops yield potential. Generous March and April rains virtually eliminated any remnants of the eastern corn belt drought from 2005, with ILL soil moisture levels basically back to normal by corn planting time. As we enter June 1, and the beginning of the summer growing season, the outlook for 2006 crops is greatly improved from expectations this March 1. Let's take a quick look at where Progressive Ag estimates the yield potential of various crops as of May 30 to get an idea on how important this might be to crop prices.
Corn yield models went up a huge 2 bu/acre the week ending May 29 as the eastern Corn Belt warmed up and dried out, allowing rapid and even emergence on the 2006 crop. Corn crop conditions improved 4% in Good/excellent category, with 70% of the crop rated G/E. The Pro Ag yield model rose 2 bu/acre to 151.5 bu, 2 bu above trend at 149.5 and 2.5 bu above USDA's 149 bu May report estimate. This will add about 180 mb to current carryout projections (about 15%) that will be considered bearish in the June report.
Especially bearish will be any additional planted acreage, with private estimates of 1-2 million additional acres vs. the March intentions. Pro Ag estimates are for a 1.5 million-acre hike, which would mean another production increase of 210 mb in the July report. Pro Ag ending stocks estimates are currently at 1.5 billion bu, almost 400 mb larger than the current USDA May estimate of 1.1 billion bushels. Further exacerbating this problem is the fact that yields are growing due to excellent early conditions, not declining.
Wheat yields went the opposite direction, with winter wheat yields down 0.5 bu/acre from last week to 41.7 bu, well below trend yields of near 46 bu/acre. We have a two week decline in winter wheat yield potential of 1.5 bu/acre, a huge decline in just 2 weeks! Although that normally yields a 25 cent price increase, prices are already so high in front of harvest that it might be difficult to improve them any more.