Forecasts of rain for the Midwest drove grain prices lower for a second day Tuesday, but it’s too late for any amount of showers to save much of the corn crop, half of which is now expected to be in poor condition or worse, analysts say.
Corn and soy bean futures fell sharply on the weather reports that show an improved extended forecast for some areas. December corn was down more than 5 percent for the week so far, after hitting a high of $8 a bushel in electronic trading Sunday.
Soybeans were down more than four percent Tuesday.
"When you have a lot of people in a market that's gone up quite a bit, they have itchy trigger fingers and they're looking for an excuse to get out," said Mike Harris, director of trading at Campbell and Co.
The latest U.S. Department of Agriculture data, released Monday, shows that just 26 percent of the corn crop is in good to excellent condition, as compared to 31 percent last week. At the same time, 50 percent of the crop, due to drought and severe heat, is now poor or very poor, compared to just 38 percent last week.
Rain is forecast for parts of the northern and eastern Midwest, while 100 degree temperatures continue to grip other parts of the corn belt. Grains have been soaring in recent weeks, and traders have warned that trading on weather is risky, volatile and highly emotional. New corn crop futures are up about 50 percent since early June.
"We're waiting for the psychological point in terms of the trade right now," said Rich Nelson, director of research at Allendale. "We've had two days down in terms of corn and soy beans. The issue now is we are seeing a change in forecast."
Harris said he believes the decline in grains that started Monday was sparked in large part by a "risk off" trade that drove stocks and other commodities lower, and the weather reports just added to the selling pressure.
He said his models point to continued increases in corn prices. "One of the reasons I liked the grain trade was it was kind of marching to the beat of its own drum," said Harris.
"What was troubling me yesterday was to see it rejoin the other commodities in a risk off type day," he said.
Goldman Sachs, meanwhile, put a $9 target on corn Monday, as investors took profits. The Goldman analysts said that $9 would be the level where demand destruction would come in for corn-based ethanol, an additive to gasoline.
The ethanol industry is the biggest user of corn. The USDA forecasts that 4.9 billion bushels of corn will go to ethanol, just slightly more than the 4.8 billion bushels that feed livestock.
Some analysts say damage was done to the corn crop at a key development stage. Much of the corn crop pollinated during hot, dry weather, diminishing its yield. But soybeans are just entering the blooming stage, and wet weather will help the crop as it moves in the next several weeks into the pod-setting stage, when the number of beans per plant are determined.
As for corn, Nelson said it's yet to be seen whether the price has peaked. "We can top this market, even though the crop is in a worse situation, and the USDA is going to recognize some much lower yields in the next two or three weeks," he said.
Dennis Gartman of the Gartman Letter told "Fast Money" late Monday that he'd be a buyer if grain prices fell. "We had a little bit of rain. We had a moderation of temperatures," he said.
"The soybean crop is in pretty good condition. The corn crop is in devastated condition. Take beans down another 50 to 75 cents, maybe a dollar. Take corn down another 25 to 30 cents, and you'll have me very interested again," Gartman said. "The corn crop has been absolutely decimated and likely even rain at this point is not going to do a great good deal of support for it."
Nelson forecasts a 122 bushels per acre yield nationwide for this year's corn crop, well below the government's last forecast of 146 bushels, and way off its early expectations for a bumper crop of 166 bushels.
Farmers planted their crops several weeks early this year because of mild, wet spring conditions. The USDA had expected a record harvest initially, on a record number of planted acres.
The crop condition numbers, published Monday by the USDA, are used as a rough measure, ahead of the USDA’s actual observations in August when it will assess the crop in the field. Nelson said the weekly conditions reports for corn will be less valuable, now that the corn has pollinated, and the next important reports will be when the USDA releases its world supply and demand estimate August 10.
"It’s in line with what I expected. In the corn we continue to see deterioration in the areas that missed any kind of showers,” said Shawn McCambridge, Jefferies Bache analyst, of this week's report.
“The biggest change we saw was in Iowa and that’s our biggest producer. They were down 13 percent in good to excellent and up 13 percent in poor to very poor,” he said. Just 23 percent of the Iowa crop was seen as good to excellent, and 37 percent was listed as fair. In Illinois, 7 percent of the crop was good and none of it was rated excellent. Sixty-six percent was poor or very poor in Illinois.
The conditions of the soybean crop also has deteriorated since last week. The USDA reports that just 31 percent is in good to excellent condition, down from 34 percent last week.
“We’re looking at showers moving through the Midwest this week and moving through some of our eastern areas and some of the northern areas. That will certainly be beneficial for the crop at this stage of development,” McCambridge said of soybeans.
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