Grain prices drop as risk of crop shortages rise, analyst says
We’ve been saying for weeks that the market seemed intent on dropping even when there was no news – essentially taking the bubble out of the grain prices we added last winter and early spring.
In one day last Thursday, we erased three to four months of soy price gains in just one day. Now, one could argue the premium we had in grains to start the 2021 year is almost gone.
Last week, our Tuesday market column title was "Down the cliff!" – extremely precise forecasting as grains did go that way on Thursday, with $1.20 losses in soybeans (the biggest daily loss ever), and huge losses in other grains as well.
While the big prices are gone, the growing 2021 crop that had such a great start (early planting into good moisture) has slowly deteriorated the past three weeks or so, with HRS wheat nosediving in crop ratings the most. Corn and soybeans also are suffering nationally, with 3 to 4 bu/acre decline in corn the past few weeks, and 1 bu/acre decline in soybeans.
Essentially, that means we’ve gone from an above-average crop in corn/soys to below average in just a few weeks – the same weeks during which prices have dropped sharply. A 2 bu/acre loss in corn per week means 180 mb of lost production with only 1.1 billion carryout projected. A 1 bu/acre losses in soybeans is 90 mb with only 150 mb carryout. So, while prices are dropping, the risk of shortages in the 2021 crop year is rising.
The western Corn Belt has the greatest risk - North Dakota, South Dakota, Minnesota, Colorado, and Nebraska. These states have little moisture going into a time of year (July/August) when we typically use stored soil moisture – moisture not present in 2021.
Weather forecasts continue to suggest cool/wet weather for the eastern/southern two-thirds of the Corn Belt, but warm/dry for the western/northern third of the Corn Belt. Today, the remaining rain system across the U.S. is leaving the Eastern seaboard, with no real organized system coming through the Corn Belt like it typically does every three days in summer. That leaves a void in rainfall; however, the forecast is for improved rain chances in the central and eastern Corn Belt – enough to keep yield potential high. But the parched western/northern Corn Belt will see further deterioration in crop yield potential.
Crop conditions out yesterday, 6/21, really emphasize the point that southern areas are doing great (improvements in winter wheat (+1%), cotton (+7%), peanuts (+4%) conditions) and declines in corn (-3%), soybeans (-2%), oats (-3%), barley (-6%), and especially HRS wheat (-10%) conditions. Soil moisture levels also rapidly deteriorated last week, with subsoil -4% adequate/surplus and topsoil -7% (very large losses). These are quite large declines in soil moisture as well as HRS wheat, barley, and corn condition ratings in one week.
The Pro Ag yield models declined 0.62 bu/acre in corn (another 50 mb lost), and in the first full data soy yield model indicates a 48.6 bu/acre yield potential – 1.2 bu/acre below trend so that’s 108 mb less production potential. When subtracted from our anemic carryout levels, that leaves almost no ending stocks, so this is a critical time for the crop. We had better get the rains forecast the next two weeks, or this crop will be in a dire condition. Markets are spiking lower this morning after a stronger opening, but the proof will be in whether we actually change our dry/warm weather pattern, or just continue to not get rains that are forecast to fall.
The market is at a bit of a crossroads: Will we get the rain to revive the yield potential of the 2021 crop? Or will we continue to decline in yield potential, just like our soil moisture situation suggests is likely to happen when crop water needs surpass the normal precip that falls (not much stored soil moisture in western areas). There just simply is no stored soil moisture left in western/northern areas, so yield losses will be determined solely by the rainfall that falls vs. the crop demands. Typically in the west, normal rainfall does not equal crop needs during July and August. So, without excessive rainfall (above normal), further deterioration is likely.
To be quite honest, if the crop continues to deteriorate, rains continue to be elusive, and prices keep dropping, Pro Ag will recommend buying call options to protect our considerably profitable and substantial sales for the 2020, 2021, ’22, ’23, and ’24 crop marketing years. Because when things were too good to be true and prices were overheated, we were aggressive sellers. And now that prices have dropped considerably and crops have deteriorated, it would be silly not to at least buy some call option protection at cheap cost to protect these great sales. After all, that’s what risk management is all about.
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