Dry weather driving markets

By Matt Reese

The dry conditions stretching across the Corn Belt have the attention of increasingly nervous markets as corn pollination progresses. Though it seems that the drought is worse in the Eastern Corn Belt, conditions are on the dry side in many areas across the country.

“Out west is not as bad as it is here,” said Matt Roberts, an Ohio State University agricultural economist. “But in Illinois you start to see the really dry conditions showing up. In a year like this we get spot rains, in a normal year we get dry spots.”

In looking at the bigger picture of supply and demand, the increasing possibility of another year of below trend line yields in 2012 is driving the markets.

“Historically, each year there is the same probability of high or low yields,” Roberts said. “We don’t tend to see repeated bad or good years, but this looks like it could be the first time in 30 or 40 years that we’ve seen three years in a row with below trend line national yields. The probability of below trend line yields this year is going up and up. The window is closing on high yields.”

While the dry weather is pushing corn prices higher, the rising prices will be reigned in by demand.

“The supply side is going to dominate this and the shortage in production is driving these prices. Right now we are in the ‘fear’ stage. Farmers are lifting hedges,” Roberts said. “But, as we approach $7, there is a lot less interest in buying U.S. corn. If we see yields of 160 bushels or below this year, we will see significant demand rationing. The $3.20 retail gasoline with $6.50 corn and no Volumetric Ethanol Excise Tax Credit is a formula for a very unprofitable ethanol industry. I do not expect to see a lot of expansion in feed demand at these prices, either. We could see some reductions in poultry demand for feed. As we go to $6.50 and $7 prices, people are less likely to consume corn. The demand is there, but we are seeing weaker interest in consumption.”

Those who are still holding old crop corn could have some exciting market opportunities ahead, but Roberts urges caution.

“There is so much volatility and that makes this a difficult game to play. The market wants to carry in as much old crop as it can to try and pull some into the new crop, but you never know when the markets will turn. If I am still holding old crop, I think it is reasonable to start selling it, or at least putting protection under it, as the old crop futures move above about $6.60. I think that will be the first place that the market starts to have trouble moving through,” Roberts said.  “If we move through that $6.60 to $6.80 range, I would be reasonably aggressive once we get to around $7. It will be difficult for prices to stay much above $7 or $7.25 on the futures side.”

The bottom line is that the market is watching the rainfall situation very closely, particularly during pollination.

“We are in a weather market and it is going to be all about rainfall and temperatures through July,” Roberts said. “Pollination is upon us and people are going to be watching that very closely.”

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