Corn is facing the worst crop conditions in two decades and the next two weeks will be critical in determining the size and quality of the U.S. crop.
The outlook is particularly difficult since expectations just a few weeks ago were for an early, bumper crop that would provide a record number of bushels and high level of corn in stock.
But unusual heat and lack of rain across the heart of the Midwest corn belt threatens this year’s crop yield and has put a fire under futures prices. Higher corn prices affect everything from cereal to sweeteners to animal feed and the ethanol in gasoline.
Corn for December delivery jumped more than 3 percent Wednesday morning to a new nine-month high, after Tuesday's 5 percent gain took it to $6.24 per bushel. The price for new crop corn futures has jumped about 24 percent since the first of the month and 14 percent this week alone.
“We need some good, soaking rains within the next 10 days, or we really are talking some yield reductions,” said Randy Mittelstaedt, director of research at RJ O’Brien.
While other grains are also impacted, Dennis Gartman of the Gartman Letter points out that the corn crop is most at risk.
“For corn is tasseling…or soon shall be…and that is its most vulnerable period of the year,” he wrote. “That is when the crop is first ‘made.’ If tasseling does not occur properly, it shall matter not what happens to the corn crop thereafter; the crop will be lost, or greatly diminished.”
So the next two weeks are central to this crop. Right now the weather for the next five-ten days looks to be hot and dry; the worst possible conditions for making but the best conditions for driving prices higher,” he wrote. Gartman also warned that investors should be wary of a weather trade, as it can quickly reverse.
The latest USDA data, released Monday, shows that conditions have deteriorated with heat and drought impacting the key Midwest growing states. The report said 56 percent of U.S. corn is now rated at good to excellent, down from 63 percent last week. There had been expectations of a bumper crop, needed to replenish U.S. stocks. Soy beans were 53 percent good to excellent, down from 56 percent the week earlier.
Mittelstaedt said the ratings are the worst his statistical analysis shows since 1993. Reuters described the crop conditions ratings as the worst since 1988, when a major drought decimated yields, and Goldman Sachs says it's the worst since 1990.
“It was perfect growing conditions this spring. It was moist and warm,” Mittelstaedt said, noting there was a lot of optimism when the crop was planted several weeks early.
“Typically, there’s a good relationship between early planted corn and higher yields. The USDA is using a record yield in their forecast,” he said. “One caveat to this argument is we do have the highest corn acreage planted in over 100 years.” He also noted that the northern growing region, including parts of Iowa and the Dakotas, as well as the Carolinas show the potential for good harvests.
The USDA is expecting 14.8 billion bushels of corn to be harvested this year, but Mittelstaedt is expecting just 13.4 billion. Last year’s crop was 12.4 billion, and the growing region of Iowa, Illiniois, Indiana and Ohio produced 5.7 billion bushels of the U.S. total.
Gartman said the total crop could be 14.2 to 14.4 billion bushels, and that number “may move lower swiftly.” The government forecast is also for 166 bushels per acre, more bullish than some private forecasts below 160. Last year’s yield averaged 148 bushels per acre.
“We see the potential for 2012/2013 U.S. corn ending stocks to be closer to one billion bushels versus the USDA which is last forecasting stocks near 1.9 billion bushels,” he said. “That’s considering conditions don’t get any worse from this point forward. The last 10 days have really taken a dramatic turn for the worse for the crop in all honesty.” Last year’s corn stocks were just 850 million, the lowest level since 1995, he said.
Michael Harris, director of trading at Campbell & Co, said the market is at a point where it is pulling in investors who normally don’t trade corn, evident in how corn was moving sharply higher to limit up levels in a “risk off” market Monday.
“This is what you always worry about when trades get crowded. You’re looking for the fast money to get into the trade. They could be looking for the first rain drop to sell,” he said. “The same volatility we’ve seen on the upside, we could see on the downside.”
Harris said the trend could continue until the weather changes. “You get fundamental people that are playing the weather and you have the systematic trend followers, who are being pulled in as the market continues to go higher,” he said.
Goldman Sachs analysts, in a note, point out that the crop conditions were similar in 2008 but they recovered over the course of the season with yields ultimately in line with the USDA’s May projection. They noted, however that the pace of planting that year was one of the slowest on record, while this year’s planting was early, having proceeded at a record pace.
“There was a vastly improved mindset that we were seeing a vastly improved situation for the coming year,” said Mittelstaedt. “That whole psyche is what’s changing right now.”
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