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Ron and Sue Mortensen: More drought talk

07/30/2010 @ 11:00pm

Traders continue to reduce their estimate of Russian wheat and coarse grain crops in the face of hot, dry weather in some growing areas.  Eventually, the crop can not be hurt any more.  It will either be harvested or be toast.  But there is a problem with information flow that will not be solved for awhile.  It is hard to get accurate information out of countries like Russia, Ukraine and Kazakhstan.  

Traders have also begun to make a multi-year phenomenon out of this drought.  The worry is that the dryness continues for long enough that winter wheat seeding (in September and October) is reduced. 

The US implications of this drought could also last for more than one year.  First, wheat prices for next year’s crop are high enough to attract farmers’ attention.  There should be a rebound in wheat acres next year, especially in several soft red winter states.  Acreage in these states was down due to very wet weather and a very slow harvest last fall. 

If wheat acres are up, then corn acres will struggle to be higher.  The market feels that corn acres need to be higher in 2011, with ever increasing ethanol demand and potential larger exports to China as the main features. Beans could be caught in the middle, with more double-cropped acres possible, but single-crop acres caught in the overall acreage fight.  A fight for 2011 acres is in the future.

There are also over 3 million CRP acres coming out of the program in September.  CRP acreage is generally highest in wheat producing states.  However, the USDA has also announced a new sign-up for CRP, because acreage will probably be below the 32 million acre target.  With high prices, the market may get a start on finding extra acres in Texas and other winter wheat states.        

The risk of loss in trading commodities can be substantial.  You should therefore carefully consider whether such trading is suitable for you in light of your financial situation. 

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