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Farm markets reach for the stars

The devastating 2012 drought continues, with the Pro Ag yield model declining again in soybeans this week, but stabilizing in corn.  

Still, we are at much lower levels for yields than USDA in their last report. Our Pro Ag corn yield model suggests a 134 bu/acre corn crop, exactly equal to Informa's best wild guess as well (are they simply using the yield formula to project yields?).  This is well below the July USDA projection of 146 bu/acre, and will result in further drastic reductions in demand due to the extremely high price (and $8 corn is an extremely high price!).  

Soybean yields have also been severely reduced, with the Pro Ag yield this week dropping to less than 38 bu/acre, now a full 2.5 bu/acre below the July USDA projection of 40.5 bu/acre.  This is essentially a loss of more than our projected carryout of only 135 mb in July! The 200 mb lost in the month of July will result in severe rationing of soybeans; but since it is food demand, it may take an extraordinary price for the market to allocate that shortage. Could beans run to the all-time commodity price high for grains of $24, marked by the HRS wheat price in 2008).  

It's quite clear from crop condition ratings and the current continued warm/dry weather forecast that markets will probably continue to go higher - even though they are already testing all-time highs in corn and soybeans (and in fact, have already broken above these levels a few times this past few weeks already).  

As far as crop condition specifics from Monday, July 30, the corn conditions declined to 24% G/E, down 2% from last week with the P/VP category moving to 48%, up 3% from last week.  However, the Pro Ag yield model has stabilized at 134.3 bu/acre, actually UP 0.76 bu/acre. So, it appears the corn has already suffered its damage for the year.  The corn actually saw a yield increase, as apparently it typically declines at this time of year for condition ratings, and the yield model is simply becoming more stable as the corn reaches into maturity.  

Soybeans, on the other hand, still are making their yield determinations as they are podding and blooming yet.  That isn't good for soybeans, as the crop conditions declined another 2% to only 29% G/E, with the 2% moving all the way to the very poor category (up 2% to 15%).  That dropped the soybean yield model another 0.33 bu/acre, now down to 37.98 bu/acre and still declining.  That should support soybeans, even though the yield models this week will not support further corn price rallies.  

It may be that soybeans continue to gain on corn as the hot/dry weather forecast mostly continues.  The next 2 days will bring rain around the Corn Belt, but virtually no significant precip into the heart of the Corn Belt including IA, ILL, IND, and OH. So, the crop yield potential should continue to decline.  In the 8-14 day forecast, more rain was put into the central Corn Belt early this week, but by Wednesday was once again removed from the forecast.  Remember, these forecasts change 2x/day - and recently it has always changed to the dry/warmer side.  So for now, the rally continues but it may be led by soybeans, not corn, in the coming few weeks.   

Technically, corn has run to new all-time highs again. So, corn has virtually no resistance above it, technically, when it is above $8.  But Wednesday morning, corn faltered and fell below $8 futures prices.  Could this be the start of a sell-off in corn? Fundamentally, there is virtually no demand for corn at prices this high, except maybe for food use (which isn't a high percentage of corn's use table).  

Contrast that with soybeans, where virtually all of the use is for food use (oil for food, meal for livestock which is valuable for human food sources).  Pro Ag thinks while corn prices might be high enough to allocate the shortage of corn due to the drought, soybeans might not be even close to being high enough for the months leading up to and including the Jan13 soybean futures month.  However, the March13 futures and forward don't have to participate in any further rally much, as that is the new crop month for SAM production, and there will be a rapid expansion in SAM production in 2013 that will help meet demand after March13.  It's the period the next 6 months that we could become critically short, and there is a risk of running to $24 or higher on these months.  These are the months to be buying soybean calls in, just in case weather remains hot/dry another 20-30 days, and that might be all it takes to take prices to stratosphere type levels. 

Note to wheat, barley, cotton, rice, and peanut growers:  This is not a drought that is impacting you in any meaningful way except for your commodities ability to substitute for corn and soybeans.  These crop ratings are still quite stable and relatively 'normal' relative to most years.  We will have an average or above average wheat crop - so wheat is only rising in price based on the corn price rally, AND the drought in Russia for their wheat crop.  So far spring wheat yields have been average to better than average (as has barley), with excellent quality throughout.     

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The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe be reliable. The opinions and recommendations contained are based on our judgment and do not guarantee that profits will be achieved or that losses will not be incurred. Recommendations should not be construed as an offer to buy or sell commodities. There is substantial risk of loss in trading futures and options on futures.

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