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Grains explode on drought stress

07/16/2012 @ 3:44pm

Corn prices jumped 4.9% Monday as forecasts for more hot, dry weather renewed concerns that a drought in the Midwest is taking a heavy toll on the nation's corn crop.

Corn futures have surged in recent weeks as expectations have fallen for a corn harvest that was once expected to set a record. In a monthly supply-and-demand report last week, the U.S. Department of Agriculture pared its estimate for this fall's corn yield by a higher-than-expected 12% from its forecast last month, to 146 bushels an acre.

Corn futures for September delivery rose 36 1/4 cents--nearly the 40-cent limit imposed by the exchange--to $7.76 3/4 a bushel Monday at the Chicago Board of Trade. The front-month contract has risen 40.8% since bottoming out in early June, and is just 23 cents away from the nominal record of $7.99 3/4 a bushel reached in June 2011.

The drought is hitting a wide swath of the corn belt, including Iowa and Illinois, the two largest corn-producing states.

The National Weather Service predicts temperatures in the 90s and low 100s for much of this week in parts of Iowa, Illinois, Indiana and Missouri. A storm due to cross the region midweek won't be enough to ease drought worries, analysts said.

The National Weather Service also forecasts above-average temperatures and below-average chances of rain across the Midwest this weekend and next week.

Corn prices could set a new record in the next two to three weeks if the hot, dry weather continues, said Doug Bergman, a Chicago-based analyst with RCM Asset Management.

Still, Mr. Bergman said, prices could ease again heading into the corn harvest around September, when the market has greater insight into actual yields. Demand for corn from ethanol and livestock producers also is expected to ease at high prices.

"A move back to six dollars is a very good possibility," Mr. Bergman said.

Corn futures surged in late June as traders braced for the drought to worsen just as the crop entered its delicate pollination phase, when moisture has its greatest impact on eventual yields. Parts of the U.S. corn crop are still pollinating, mainly in northern areas like Minnesota and parts of Iowa.

Crops in other areas have finished that step--but still face the risk of dry weather further reducing yields.

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