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Central Corn Belt drought getting dire

Ray Grabanski 07/06/2012 @ 9:09am President, Progressive Ag www.progressiveag.com

Drought conditions are becoming dire in the central corn belt, with corn and soybean conditions deteriorating fast in the central corn belt states of eastern IA, ILL, IND, OH, KY, and TN such that crop conditions are taking significant drops each week.  Last week, crop conditions in both corn and soybeans nosedived to 8% losses due to little rain and hot conditions.  The Pro Ag yield models declined significantly in both corn (-3.7 bu/acre) and soybeans (-1.15 bu/acre) to only 148.5 bu/acre corn and 40.4 bu/acre soybeans.  These numbers are dramatically below the current USDA projections, which are currently at 166 bu/acre corn and 43.9 bu/acre soybeans.  By cutting the yield that much, we would lose 18 bu/acre corn or 1.620 billion bushels of corn production, almost the entire carryout!

It's easy to see why grains are rallying dramatically when you look at the current rapid declines in crop conditions, as last week's decline in corn of 3.7 bu/acre amounts to 333 million bushel lost last week in yield potential, while the bearish June 29 acreage report increased acreage 0.5 million acres (about 75 million in production hike).  So even with bearish news in the acreage report, we still lost about 250 million bushels last week from our projected carryout.  That takes corn down to only about 300 million bushels carryout, smaller than stockpile supplies and we are still dropping that yield model significantly each week due to the drought grip on the central corn belt.  

In soybeans, we 'found' nearly 3 million acres in the report, which amounts to about 120 million bushels of extra production to add to the 145 million carryout, bringing us to a comfortable 265 million bu carryout IF there was no loss in production.  But last week we lost 1.15 bu/acre or 86 million bu (almost equal to the entire acreage hike), and total our soybean yield is 3.5 bu/acre below the current USDA projection of 43.9 bu/acre, or a total of 262 million bushels of production.  That virtually eliminated the soybean carryout, and we still are cutting production potential sharply each week due to the current drought.

Yes, the corn belt drought is for real, and it is cutting dramatically the production potential of the 2012 crop.  We have already virtually eliminated the entire carryout of corn and soybeans (even with the June 29 acreage hikes), and the yield potential is still dropping dramatically each week.  Yes, this is a drought market, and yes, it has potentially dramatic upside potential from here IF the crop continues to go backwards as quickly as it has over the past month.  

The next 45 days are critical in this 1988 type drought, where crop yield potential is dropping dramatically in the corn belt. Unless it begins raining soon, we will have quickly depleted our projected US carryout, and the bullish market might then challenge the old highs of 2008 in both corn and soybeans.  

Of course, much depends on the weather the next 45 days: currently the long range forecast is suggesting cooling temps and more precip for the corn belt. If that occurs, it will take some pressure off the market to continue its current torrid rally. But then again, long range forecasts are updated 2x/day! This could change in the next 14 weather runs over the coming 7 days, and that might be the linchpin for all grain markets for now.   

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