Hot and dry conditions across much of the Corn Belt this summer continue to threaten row crops. The new-crop December corn futures price has increased by more than $2 per bushel since June 15, to its highest level in 9 months. With U.S. farmers planting more than 96 million acres of corn, as reported by USDA in its annual survey of planted acreage issued June 30, the average crop yield for 2012 will be critical in determining whether supply is adequate to meet demand for the corn crop.
"Farmers often struggle in making grain marketing decisions in major weather markets," observes Steve Johnson, an Iowa State University Extension farm management specialist. "That's because they're typically watching their own crop conditions deteriorate while futures markets move higher."
Johnson provides the following observations and guidelines he has recently gleaned from talking to a number of market analysts as well as farmers, grain merchandisers, elevator managers and others. Accompanying this article are the December 2012 corn futures price chart and the November 2012 soybean futures price chart, both showing how prices are responding to this summer's blistering weather conditions.
How does this year's drought compare with the drought of 1988?
Many people are comparing weather patterns and conditions of this year's drought to that of 1988, the last major widespread drought to hit the Corn Belt. Extended weather forecasts continue to call for hot and dry conditions, which are causing crop stress during the critical pollination period. This extreme heat and recent lack of rainfall have started to reduce yield potential for both corn and soybean crops.
The new crop November soybean futures price has increased more than $2.50 per bushel since early June. Tight U.S. soybean ending stocks should keep excitement in the soybean market as well, perhaps longer than corn. Key rains will hopefully come in August and that will prove critical to increase bean yield. The USDA survey shows U.S. farmers this year have planted their third largest soybean acreage in history, but timely rains during the pod-filling period in August will still be very important to produce the amount of soybeans that the market is now demanding.
Recent corn, bean futures prices are classic moves in serious weather market
"Note that major bull moves in futures market prices in June are not unusual," says Johnson. "The recent price spikes in corn and soybean futures prices are classic moves that occur during serious weather markets as we witnessed in 2008 and 2011."
Nearly every year some degree of a weather market develops and impacts the corn and soybean futures during the summer months. This is the period of time in the northern hemisphere that the vast majority of the world's corn and feed grain crops are grown and about half the soybeans are produced. The difference in 2012 is the magnitude of the weather scare and its rapid expansion beyond the Eastern Corn Belt as compared to recent years.
Bull markets often peak in June or early July, past history has shown
According to Jim Wyckoff, technical market analyst, most speculators are looking at this bull market run in the grains to buy early and profit from rising prices. It's logical for them to reckon that if the months of July and August remain hotter and drier than normal, then grain prices will continue to rally during the summer timeframe, as the crops continue to deteriorate.
Many speculators also figure that since the bull move in grains has only been at full throttle for a few weeks, there's still time to climb on board. These bullish desires will be fed by the general media as they hype the record temperatures set in much of the Midwest in early July.
However, history shows that weather scares in the grain markets can be short-lived and bull runs in grain prices generally end well before the expectation by the vast majority of traders. Grain futures market price action can turn on a dime if the weather forecasts unexpectedly change, which history shows can certainly occur.
In 1988 corn and soybean futures prices put in their tops the first week of July
For a perspective, the last major drought in the U.S. (1988) saw corn and soybean futures prices put in their major tops the first week of July—even though the majority of the damage and yield reduction to those crops occurred during July and August.
Wyckoff thinks that heading into the days around the Fourth of July holiday period, speculators who had not been paying attention to the grain markets will catch wind of the weather market playing out. They will eagerly place their bets on the long side of the grains. This market behavior is typical with weather rallies in the grain markets.
Expect the general media to report extensively on the serious heat and dryness. As a result, most likely the biggest wave of speculators jumps in to buy futures contracts before they move even higher. Prices then peak with profit taking of the early speculative investors. Prices turn lower and farmers are frustrated that they missed out on high futures prices, again.
Conclusion: Farmers often struggle in making marketing decisions in major weather markets. That's because they're typically watching their own crop conditions deteriorate while futures markets move higher.
Remember to separate new crop sales into delivery and non-delivery bushels, advises Johnson. Guaranteed insurance bushels should be the target of those committed to delivery using forward cash contract and HTAs. Non-insured bushels or those you prefer not to deliver can be protected by buying put options or hedges through your commodity broker.
History favors futures prices that top out much sooner than the majority of traders or farmers ever thought.
For farm management information and analysis go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.