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1988-like drought conditions continue
While 1988 like drought conditions continue, the forecast is starting to change with now normal to above normal precipitation forecast for the next 2 weeks in the eastern corn belt, perhaps the most parched area of the corn belt. That means that there is a possibility that crop conditions could improve in the coming weeks if the forecast rain does fall. Of course, so far this week the drought like conditions are continuing to damage corn and soybean yield potential in a good deal of the corn belt.
The condition of the crop has severely declined in recent weeks, as evidenced by Monday, July 9 ratings. Weekly crop conditions once again were sharply lower, with corn losing 8% in the G/E rating to now be only 40% rated G/E, with the Pro Ag yield model declining a large 5.4 bu/acre to only 143.1 bu/acre (we lost about 480 mb last week in production potential). Soybean conditions dropped less, down 5% to also be 40% G/E, with the yield model declining 0.36 bu/acre to 40.08 but still an alarming loss of production (down about 27 mb in production in only 1 week). Also declining in condition ratings were HRS wheat (-5 to 66% G/E), sorghum -2% to 32% G/E, rice -3% (to 69% G/E), and oats (-2% to 63% G/E), and barley -4% (to 57% G/E). Overall, we lost yield potential last year in almost all US crops, but the largest impact was in corn.
While almost the entire corn belt farm population assumes now that prices will continue to rise under the drought conditions, the Wednesday USDA report produced an opposite result even after the report was much more bullish than anticipated. While many expected corn yields around the mid 150's and soybeans around 42 bu, USDA shocked the trade by dropping yields all the way down to 40.5 bu/acre soybeans and 146 bu/acre corn. These numbers are about as low as our yield model, and typically USDA only drops yield estimates half as fast as these models drop them!
But USDA was aggressive, and cut the yield sharply (12%) in corn, and also cutting demand significantly so that they could still show a 1 billion bushel carryout in corn in spite of the paltry yield estimates. One has to wonder, are prices already high enough to allocate the short crop?
Soybean yields were also cut sharply, but carryout was lowered only 10 mb to 130 mb, as demand was cut sharply and the higher June 29 acreage numbers were incorporated into the report. That means we have only pipeline supplies, though, and that is bullish indeed. However, in spite of the bullish USDA report and tight stocks and continued lack of rainfall in the Corn Belt proper, grains formed downside reversals on report day. Perhaps the bull market has run its course? Pro Ag notes that nearby futures have now run to the 2008 highs or higher, reaching some technical objectives the market would have been holding for years.
Perhaps the bull market is showing some cracks in its armor?
Pro Ag was targeting selling grain again at $7.35 Dec corn and $16.40 in nearby soybean futures; we hit those targets earlier today before reversing sharply to form daily downside reversals on corn and soybean charts. Perhaps the rally is over? We note that we are at price levels that justify making sales again in corn and soybeans. In buying back hedges 2-4 weeks ago, and rehedging at prices much higher, we will have raised our net price for grains by almost 50% in just 3 short weeks of dry weather! One has to wonder, can it get much better than this?