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Drought deepens in Corn Belt

The 2012 drought has taken a deeper hold on the central Corn Belt states, with significant crop conditions declining in ILL, IND, OH, KY, TN, and MO last week that signify the rapid descent of yield potential in the 2012 crop.  

For the U.S. soybean yield, Pro Ag models suggest a crop of only 41.6 bu/acre, well below the 43.9 bu/acre USDA is projecting, and showing a large drop from the last three weeks.  Essentially, the 2 bu/acre difference would put out current carryout projection at -5 mb (down 150 mb from 145 mb), and obviously soybeans would be in need of price allocation of the shortage.

Corn is similar, as the current 152 bu/acre projection is 1.26 billion bushels smaller production than currently projected, and thus wiping out two-thirds of the current projected 1.8 billion bushel carryout.  The speed at which the crop is declining (about 3 bu/acre per week) is about 270 mb of lost production per week, under droughty conditions.  Even if the acreage report shows another 1 or 2 million acres of planted acreage, even that is being eliminated about every week (160 to 320 mb of extra production).  

It has become clear, this week, that the market needed to rally more emphatically, and that is what it did with 85c gains for three days of trading into Thursday, on corn.

Soybeans are rallying as well, but not as emphatically as corn this week, with their ability to bloom over a longer period of time. So, their chance of catching some rains extends longer than corn.  And thus, soybean yield potential is not declining as quickly and permanently as the corn yield at this time? Overall, soybeans have actually increased in raw price less than corn this week, an unusual situation indeed, as our projections show soybean stocks are tighter with current projections due to the South American Crop failure.  But, the market feels that soybeans have more time (will soybeans rally more emphatically at their critical stage of bloom, then?

Wheat is not participating in the crop failure in the United States, as the rains have been frequent in HRS wheat country, with winter wheat over half harvested and not in need of rain.  In fact, our yield model for winter wheat suggests a record large winter wheat crop is possible.  HRS wheat country has been getting frequent rains, and conditions there are ideal for a bumper crop as well.  So, there is not a crop problem in wheat production in the US (now Russia might be a different problem due to relentless summer heat).  

But, wheat prices must follow corn higher, as wheat is priced in the feed bunk in many areas, with a weak basis now for wheat at harvest.  If wheat is a feed substitute, corn cannot go to a premium to wheat and last long.  

So, we have an interesting summer unfolding, with the largest potential drought-induced rally in decades unfolding right before our eyes.  This is a time to make sure you have professionals managing your hedging portfolio.  As the drought deepens in the Corn Belt, and we continue to rise through the most critical time for harvest development, we have to 

ask ourselves what will the market look like when it's topped?  Usually we have rapid price gains, hit some price resistance on charts, and then we see a host of end users exit from the use of the commodity in shortage corn and soybeans).  When that happens, the rally might be over (or if it rains); and that could occur within the next 45 days!!!  Will the market do it, and when!


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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