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Midwest Drought Sends Grain Prices Soaring And A Look At Other Commodities

July 9, 2012  | 3 comments  |  includes: CORN, DBC, SOYB, WEAT

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Source: MRRCC Midwest Drought Information Center

The historical Midwest drought is gaining more and more market attention and threatens to challenge one of the worst U.S. grain disasters ever. It has not been since 1988, and perhaps even the dust bowl years of 1936, that it has been this dry and hot across the U.S. grain belt. Given the present weather pattern the next couple weeks at least, Steinback's "Grapes of Wrath" may unfortunately depict what is going to happen to some American farmers, though of course in a bit less relative scale to the Great Depression years of the mid 1930s.

The Dust Bowl days in Iowa in 1936 (top picture) and the recent Colorado Fires (bottom picture).

The incredible dry soils over the Plains to Indiana is only acting to feed a hot-dry hot pressure ridge, even in the face of El Nino conditions. Normally during early El Nino events this is not supposed to happen.

SOURCE: Wikipedia

Corn and Soybean Prices on a Tear

U.S. corn and soybean crop conditions continue to fall and may fall another 7-10% in this afternoon's USDA weekly crop report. This reality and the likelihood of further reductions in the next week or two means the percentage price move in corn and soybeans might even surpass that of 1988 (below)

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December corn following the same price pattern as 1988.

One possible big difference? The summer's drought eased in August, 1988 sending grain prices south, but this summer, there are NO signs of a general change in the weather pattern. This could mean higher grain prices still and also cause some adjustments to our national Ethanol program.

Source of charts--DTN/Prophet X

Commodities Affected by the Weather

The Corn ETF (CORN) continues to surge and still has another 5-10% in it the next few weeks given the U.S. drought that I expect to worsen. Other grain prices will follow. Wheat has rallied some 15% as well the last few weeks and worries over recent floods in Ukraine, following drought conditions earlier are adding to the woes in this market.Soybeans have a chance to challenge $17 later this summer if this drought continues another month or so. Given certain teleconnections I look at and global warming, I do not see this drought breaking any-time soon, so this is a real possibility.

World supplies of sugar are fairly robust but a very weak Indian Monsoon is going to threaten oilseed crops and at least 40% of the nation's sugar cane crop the next few weeks. With wet weather returning to Sao Paulo and Parana, Brazil, this could further impede the quality of the sugar crop. With India and Brazil being huge players in the world sugar market, these two weather scenarios are looking more and more like 2009, whensugar prices soared some 30% during the summer months. While I do not expect sugar prices to soar nearly as much, selling October $1900-$2000 puts may be a conservative safe play in this market, as prices will at least, not fall out of bed.

Coffee prices have staged a modest rally after falling to a year and a half low of $1.50/lb two weeks ago. The initial 40% collapse in coffee prices the last year, has been due, not only to worries over the European economy and weakened global demand but the onset of the largest Brazilian coffee crop ever. Most recently, heavy rains in N. Brazil have lowered the quality of the Brazil crop and hence, we have had a bit of a rally.

December cotton prices rallied off their 2-3 year of 67 cents/lb. due in part to the worsening U.S. cotton crop, the slow Indian Monsoon and oversold market and rebound in some outside markets. Excellent drought easing rains in China and an improvement this week for rainfall in Texas and the Delta were key reasons for the late week sell off last week. If it were not for the improved U.S. and China weather situation, I would think cotton would be a buy due to my expectations of further crop issues in India in the coming weeks.

Natural gas prices reached the highest point in months late last week ($3.06 basis the nearby August contract), but gave up those gains due to our forecasts of cooler weather this week in the eastern U.S. and rain cooled air in the deep south and Texas, following record breaking heat. I do not think prices will break below the $2.50 basis August contract, given a return of warmer weather again to many consuming areas in the eastern U.S. and Midwest this weekend and next week, but as far as forecasting a major bull move, I am not sure this is in the cards given the still huge supplies and the odds of an El Nino type "weak" second half of the hurricane season.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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