Drought rockets grain prices higher

Corn during drought 2012
Corn during drought. (Farm and Dairy file photo)

The last three weeks have left us struggling to understand exactly what we are seeing in the grain markets.

We thought there were reasons to have higher prices, but prices declined, on wide swings. Now we have some market direction, and it was exciting last week.

All major commodities were very much stronger last week, as observers have decided that we are definitely in a drought of large proportions and that crop ratings are declining. This kicked off spec fund buying late in the week to add to some idea of direction.


What we do not have is a drought that is known to have hurt production projections very much. Yes, we were left with an idea that the decline in conditions could continue, but so far the area affected has not spread in the last week, although it is large.

We continue to see 45% of the major corn production areas to be considered in drought. What does this mean as we near the end of the third week of June? It means that tough weather conditions coincide with the seasonality of prices that suggests that corn price highs often come in June.

In our Monday morning conference call, most observers were concerned about dry weather, although there were areas of spotty rain reported. The general feeling seemed to be that the crop was not at a critical stage yet, and continued spotty rains would keep us going.

The fear was expressed that we didn’t want to overreact to the drought yet, as we have a lot of corn acres planted, and a switch in rain patterns could quickly have us talking about big crops again.

Still, it is a fact that late last week, spec funds added maybe 19,000 contracts to long positions of corn, 17,000 contract of soybeans, and 10,000 contracts of wheat.

Fickle market

These position changes represent a large, if fickle, change in the market. I say “fickle” because the funds can reverse on a dime, and a little rain could get them to reverse. So, what to do?

Seasonally, June is so often a high point for corn prices that we need to respect that and not overstay our sales with bullish enthusiasm. It will be easy to miss this market.

By the time most of you read this, there will be just a little more than a week left in June. I know, the farmer benchmark is that the Fourth of July is the high of the market a lot of years, but it you check, that date usually provides a second stab at late June pricing.

The optimistic farmer in me thinks that we get enough rain to get through, and the market retreats. The analyst in me notes that we traded this market too low, so we have so far over-reacted back up. I love to sell on over-reactions.

Having said that, I must admit that I am conservative and have a history of selling too early. If you notice, I have left myself protections from criticism about being wrong no matter what happens!

I am glad it is not my money I am betting. My social security check will remain the same if it rains or does not. Complicating this matter is the fact that we ended up with a long weekend without trading futures because of the Juneteenth holiday, new this year.

That means we have gone three days without a futures market, and the market does not open until seven o’clock this Monday night, after this is written.

There are those who fear that, after a big week up that may have been up even more because of fear of a three-day break, we are destined to open lower.

Since the weather is currently forecast to not give us much rain for 10 days, the open tonight may not matter. Some think that the scattered showers of the weekend will inspire a lower open tonight, especially since Central Iowa, currently a good spot, got rain.

Some think that since Northern Illinois did not get rain, the traders in Chicago may be predisposed to “continue the drought.” There is the adage about whether it rains on LaSalle Street (where the Chicago Board of Trade is located). Ya pays yer money and ya takes your choice.

By the numbers

Let’s look at some numbers. July corn futures were up 36 cents last week, to $6.40 1/4. It was not that long ago that we were trading below $6 and trying to figure out why.

The December new crops futures were up 67 cents, to $5.97 1/2. This is close enough to the psychological barrier of $6 that we might not see it right away, or, we may blow through it.

Whatever, if we get significant rain over the 45% of the country that is dry and producing the corn crop in the next few days, we will not have $6 December futures next fall.

Remember all the acres that are planted, although they are not counted. The 800,000 acres we planned to plant in North Dakota did not happen as far as I know.


Now, the soybeans. Although there are reports of poor stands and little development in the soybeans, the fact is that planting is ahead of normal. With the trend to early planting, our normal will continue to change over the next few years.

This year, the soybeans are trying to grow in the first couple of inches of dry ground, and it is not going well. Still, it is July and August that are critical for beans, especially August as we set pods and fill them. I have seen great bean yields on short growth that got good weather in August.

July soybeans were up 80 cents last week. Put that in your diary. That means you need to do something, even if it is the wrong thing. The November new crop were up $1.38 for the week! The Friday close was $13.42 1/4. We traded at $11.30 1/2 three weeks ago. This is how volatile a market we have.

Beware that the big jumps come early, on fear. It will be hard to add to this price as we go on. Don’t be brave, don’t be stupid. Again, it is easy to say that, as I don’t have any money at stake.

Chicago wheat futures gained nearly 60 cents last week, for no good reason except for sympathy with the other grains. If you have wheat to sell, now is a good time. They will be the first to turn around, because they are not trading wheat fundamentals.


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