Prices rise on U.S. drought worries

Crop markets are dominated by worries about the U.S. Midwest drought.

As a result, prairie farmers are seeing prices shoot high for crops that until recently didn’t seem to have great market prospects.

The good news is that many analysts think this rally has legs to run. Nothing in recent U.S. Department of Agriculture reports suggested there is an easy way to fill the hole created by the corn belt drought, and weather forecasts at the end of June did not predict rain coming soon.

“We could be left with a much more bullish situation,” said DTN market analyst Darin Newsom in a webinar following the release of USDA acreage and quarterly stocks reports June 29.

While most market analysts said the USDA numbers were slightly bearish, the overwhelming potential impact of the drought reduced the report to a five-minute event.

“Now, back to watching the weather,” said one tweet from an analyst moments after the report’s released.

However, Newsom said the USDA has not yet lowered its outlook for crop production and stocks, to match the reality of crop damage that many on the ground see.

Newsom said the USDA’s forecast in early June of tight soybean supplies and comfortable corn supplies could fall dramatically for soybeans and substantially for corn if the Midwest drought is having as big an impact on crop potential as many think.

For instance, instead of the present projection of corn supply exceeding demand by almost 14 percent, the surplus would drop to only 1.8 percent if yields fall to 149 bushels per acre, which Newsom thinks is possible if it stays dry.

The USDA’s current corn yield projection is 166 bu. per acre.

The USDA’s next projection for yields and crop production comes out July 11.

Corn is now tasselling and damage can’t be made up later, even with ideal weather.

Yields would suffer and the carryout would fall dramatically if soybeans, which don’t set their potential for another couple of weeks, are damaged now and through their crucial stages.

If soybean yields fell to 37.8 bu. per acre from expectations of 43 bu., then the crop would fall short of current demand projections by about five percent. Prices would have to rise to reduce demand.

Winnipeg analyst Greg Kostal said he thinks it will be easier to ration demand today than in 2008 because the global economic circumstances are more fragile.

The recent crop rally has been impervious so far to a general slump in commodity prices, including a big selloff in gold and crude oil.

For many years, agricultural commodities traded closely with trends of other commodities, but the present crop rally has broken free of “outside markets.”

Several analysts in recent months have declared the commodity bull market of the past year dead.

Barclays Capital, which is still bullish on many major commodities, noted the steep fall in commodity values in its June 29 newsletter.

“Recent commodity price declines are the steepest since the months following the Lehman’s crisis, suggesting markets expect little progress in the European debt crisis and are pricing in a further deterioration in Chinese growth.”

Commodity and stock markets rallied strongly June 29 after the 19th eurozone summit dealing with the ongoing financial crisis appeared to buy breathing room for struggling Spanish banks and the Spanish government, and to take pressure off Italy, which is considered the next country most likely to slide into severe financial trouble.

The rally encouraged many to believe the commodity bull run was not over yet, and this time ag commodities could lead it higher.

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