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Drought pushes grains sharply higher
Grain markets surged higher again last week as the massive drought continued throughout most of the Midwest and central plains. Crop losses increased as the searing heat cooked what was left of the corn crop and really began to take a toll on the soybean crop. Crop conditions are the lowest since 1988, with some traders convinced it’s just a matter of time before the damage surpasses that benchmark year.
The heat ridge has settled in over the western Midwest and central plains, which now makes the majority of farmers in the country significantly affected by its devastation at some point during their growing season. According to the USDA, 62% of farms in the US are experiencing drought; 88% of the corn crop and 87% of the soybean crop are in drought regions. NOAA is forecasting that August will continue to see hot and dry weather for the key growing regions.
Markets, of course, have responded – albeit slowly at first but surging in the last two weeks. Just last week, wheat rallied right at $1.00, corn was up about 70 cents and soybeans up $1.15. Since the rally began, wheat has risen $3.25, corn is up $3.20 and soybeans are up $4.46.
While wheat will be tugged in both directions by corn and soybeans, the market is also factoring in increasingly bullish fundamentals from around the world.
The Black Sea region has suffered adverse weather since last fall and the governments are finally acknowledging the problems. Ukraine grain harvest is 72% complete with production about 24% less than last year. Russia’s total grain production is down about 15% from last year and exports are expected to be around 14 MMT, half of last year. Kazakhstan is in the same boat with total grain production only half of last year’s record 27 MMT; their total grain exports are projected to be just 10 MMT compared to last year’s 21 MMT.
The Europeans have resumed the wheat harvest after long rain delays and what looks like a drop in quality. Argentina is projecting that wheat plantings will be down about 22% from last year at 3.6 million hectares. Australia had some issues with their planting season, notably the dry conditions in Western Australia and some pockets in the east that have resulted in slow emergence and establishment before the semi-dormancy period sets in. Spring rains could easily negate those problems, however.
As we head into Monday’s trade, grains are lower on rains forecast for the perimeter of the Midwest and some good chances for scattered rains in Iowa and Illinois about mid-week. The crops obviously need more than that, but at least it’s something for now. Toward the end of the week it looks like heat returns along with more dryness to those key growing areas.
The corn crop is least likely to give in to selling pressure as much of the damage is irreversible. Soybeans, however, still have time to recover if the weather improves and thus would be most vulnerable to a sell-off.
The odds are good that we’ll get a pullback in wheat and the row crops which could end up being a sharp setback. But the odds are also good that there is still more left in this weather market and we should see yet new highs before this longer term rally is all said and done.
Technically, wheat’s support shows up at the minor spike high from July 9 at 8.59 basis Chicago September. Kansas City Sep support is at 8.46 and Minn Sep at 9.37. Sep corn support shows at the minor gap at 7.49, while Sep soybeans support is at 15.93. I would look for the market to hold those levels on a correction, and then see another leg up from there.