Market Insider

How Record Heat Wave Is Threatening a Key US Crop

Farmers have planted the most corn since 1937, but record-setting heat is threatening the crop yield, and it is unlikely to provide much relief to dwindling supplies.

Sun shines on seed corn plants in a field in Tiskilwa, Illinois. Corn supplies in the U.S., the world’s biggest exporter, are declining at the fastest pace since 1996 just as a Midwest heat wave damages the world’s largest harvest for a third consecutive year.
Daniel Acker | Bloomberg | Getty Images

New crop corn futures for December have jumped about 15 percent this week as the heat wave continues and hot, dry weather from the central plains to the eastern corn belt looks set to stretch into the critical “tasseling” period, when the corn is made.

The December contract was at $6.37 per bushel Friday afternoon.

“Tasseling started about two weeks ago in the far south. So places like Oklahoma, Texas, Arkansas, and southern Missouri, that’s been going on,” said Rich Nelson, director of research at Allendale. “Where the bulk of our production comes from, tasseling is going to start mid-next week and go for three weeks.”

“The current forecast out to two weeks from now, the eight to 14-day forecast is hot and dry. The government NOAA forecast for all of July has hot and dry as well,” he noted.

The latest Agriculture Department data, released Friday, showed a 96.4 million acre corn crop, even greater than traders expected. The USDA showed the planting of soy beans, which hit their critical development phase in August, is the third largest on record.

“The biggest thing here is the weak or poor yield prospects are more than offsetting the benefits of higher acreage,” said Randy Mittelstaedt, director of research at RJ O’Brien.

He explained that the tasseling  period needs cooler, wetter weather since that is when kernel size and quality is determined.

The USDA also reported as of June 1, that the corn stockpile was just 3.15 billion bushels, the smallest amount since 2004 for this time of year. Just several weeks ago, expectations were high that an early planting and wet spring weather would generate a bumper crop, putting more corn into storage.

The USDA is still forecasting a total yield of 14.8 billion bushels, and while the yield this year could still be a record, market expectations are coming down.

If the bad weather does continue until the end of July, “that’s going to give us a production of 12.9 billion bushels, and in terms of records, that would be just under the previous record of 2007 that was 13.038 billion,” said Nelson.

“We do need more corn because we have a higher demand base. We have the ethanol issue here which has changed the industry in the last 5 years,” he said, noting 37 percent of last year’s production went to ethanol. But gasoline demand is falling so that would impact ethanol demand.

Nelson said the heat wave dramatically changed the market’s psyche in a short period of time, and it has left buyers, like livestock and food companies, concerned.

“End users are concerned because they were lulled into a complacency. They didn’t do a lot of hedging. In their minds, we were going from a tight crop and they were all looking for a big crop and lower prices this fall,” he said.

The USDA forecast is for 166 bushels per acre, but the USDA will reassess that forecast when the crop can be better judged in August and September.

“We feel yields are 153.9 bushels per acre,” Nelson said, adding if the hot, dry weather continues, it could go to 145.3. “Last year we also had a weather problem. That was down to 152.8.”

Shawn McCambridge of Jefferies Bache said, however, there are already signs of slowing demand with lower exports.

“We have seen several of the ethanol producers announce plants being idled,” he said.

The rising price of corn has been a factor. China had been building reserves but as prices rose, it stopped those types of purchases, he said.

Last year’s crop has been expected to have resulted in about 850 million bushels in store, the lowest level since 1995, and USDA forecasts for this year are for 1.9 billion bushels.

Analysts caution that a market driven by weather can turn just as quickly if the weather changes. Mittelstaedt said it is a concern that the CME will not have trading in grains from Tuesday afternoon to Thursday morning, due to the Independence Day holiday.

McCambridge agrees. “When we’re in a weather market, any minute that you’re closed heightens the anxiety,” he said. Corn came off its highs because of rain showers Friday and profit-taking ahead of the weekend.

Follow Patti Domm on Twitter: @pattidomm

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