The market needs to rally, analyst says

All doubt about the US drought was removed Monday in the Crop Progress Report, as once again corn (-3% to 63% G/E) and soybeans (-4% to 56% G/E) both declined significantly.  

That drops the Pro Ag yield models a large 0.73 bu/acre in soybeans (to 41.8 bu) and a large 2.21 bu/acre in corn (to 155.9 bu/acre).  These yields are well below 'trend' and current USDA projections of 166 bu/acre corn and 43.9 bu/acre soybeans.  If the final yield turns out that low, prices would need to allocate the short US crop among competing interests.  And the season is still in June, with a warm/dry forecast ahead for the next two weeks!  

Clearly the market needs to rally, and so far this week it accommodated, despite zero support from outside markets.  But, we are in the middle of a serious Corn Belt drought in the central and eastern corn belt, with topsoil moisture depleted as we enter the pollination stage for corn and bloom for soybeans.  Note that 5% of soybeans are now blooming (vs. 2% average) and 5% of the corn is silking (vs. 2% average), so this is now the critical time period in development of the corn and soybean crops in southern states.  And we are in the middle of drought in the southern Corn Belt!  

The only bright spot in the US crop development, so far, is wheat. The conditions improved in winter wheat 1% to 54% G/E, with winter wheat now 48% harvested (vs. only 16% average) which shows that yields are better than expected.  The Pro Ag winter wheat yield model jumped 0.20 bu/acre to 48.9 bu/acre, a new record shattering yield.  This drought does not include wheat crops, as they reached maturity for the most part in winter wheat and the drought is not in HRS wheat country (the Dakotas, MN, WI are the garden spots of the Corn Belt!).  Illustrating that is easy by just looking at crop conditions: HRS wheat IMPROVED 1% to 76% G/E, while barley conditions improved 3% to 67% G/E, with rains frequent in the HRS wheat belt last week.  Basically, the rain is falling all around the corn belt, but not in the central and eastern Corn Belt (a blocking pattern? 

Dome of doom?).  Note, cotton is also not part of the drought, with conditions improving 2% last week to 53% G/E! This drought is in the Corn Belt, and primarily in ILL, IND, OH, KY, and TN but also impacting IA and MO adversely.  This is indeed the heart of the Corn Belt.

We will need to try to liquidate remaining hedges, on a drop back to $5.35 Dec corn and $13.45 Nov. soybeans. These are our targets to lift remaining hedges for now.  Wheat producers may not need to do anything, or could use corn or soybeans to reduce hedged positions by buying those markets. Wheat is not being directly affected by the drought.

On 6/14 and 6/15, we recommended removing half the short hedges in corn, soybeans, and wheat and also half the short spec positions as well.  Let's leave them off until we see an improvement in our yield model OR a significant drought busting rainfall in the eastern Corn Belt. For those with recommended profitable hedges in 2014 and 2015 crops, we bought 'at the money' calls against new crop 2012 futures ($13 Nov.12 soybean calls and $5.20 Dec12 corn calls, for example) to cover the 2014 and 2015 short positions.  

We will want to get short through the June 29 report (as Pro Ag anticipates another 8 to 10 million planted acres added to USDA March figures). But, then again we can put those short positions on at 7 am that day, and remove them at 8 am again, as we expect US planted acreage to 

expand by 8-10 million acres in that report (which will be bearish).  But, if the yield on the entire US crop declines to 10% or more below trend, those extra acres bushels can quickly be erased!!!  Thus currently we are not wanting to remain short with adverse US weather developing.   

Yes, indeed, the 2012 drought is underway; and within the next 45-60 days, we will know if it compares to the 1980, 1988, or similar major droughts. But, so far, it does look like this one could rival some famous past droughts in its severity and degree of market impact!!!


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. 

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