July 20, 2012

 

Corn, soy soar to record highs on worsening US drought

 

 

As the worsening drought in the US farm belt stirred fears of a food crisis, corn and soy soared to record highs on Thursday (July 19), but prices came off their peaks at the start of Chicago trading after rain fell in parts of the Midwest.

 

Chicago wheat futures also pared gains, but prices remained near their highest in four years, up more than 50% in a month. Wheat has gotten a boost from corn and soy futures, along with crop troubles in Europe, particularly Russia.

 

Updated US weather forecasts called for light rains in Michigan, Indiana and Ohio on Thursday (July 19). Still, large swaths of the Midwest, which accounts for three-quarters of the corn and soy produced in the US, will remain dry.

 

There were rains overnight and on Thursday (July 19) morning in part of Illinois, a top corn and soy growing state, and in Chicago, home to the global citadel of grains trading -- the Chicago Board of Trade.

 

"There is some of that mentality," said grains analyst Dan Basse, president of AgResource Co in Chicago, alluding to the adage that grain traders sell when it rains on La Salle street, the city's financial district.

 

Corn prices began to retreat when pit trading at the CBOT began at 9.30 am Central (1430 GMT). A weather report from the Drought Monitor on Thursday (July 19) showed that the worst drought in 56 years was expanding. Half of the Midwest was in severe to exceptional drought, up from about a third of the region a week earlier.

 

The National Oceanic and Atmospheric Administration said on above-average temperatures were expected over the vast majority of the contiguous 48 US states in August, with below-average precipitation for the Midwest.

 

The high prices for corn and soy in the world's largest grain exporting nation were beginning to dent sales. US government data on Thursday (July 19) showed that sales of soy to buyers overseas fell to the lowest level in six months last week. For corn, the weekly sales were one-fifth of a year ago, with Taiwan choosing to cancel a large purchase.

 

"I hesitate to use those words (food crisis) but the circumstances are more severe now than they were in 2008," said Dennis Gartman, a commodity trader and editor/publisher of The Gartman Letter.

 

Key ingredients in the food crisis of 2008, which combined with other political factors to topple the government in Tunisia, were crude oil prices rallying to a record high above US$147 per barrel and prices for rice surging in Asia -- two elements that are missing this time around. Asia has an abundant supply of the rice staple this year, while US crude oil is well below US$100 per barrel.

 

Chicago Board of Trade spot September corn rose 0.5% to US$7.98-3/4 per bushel after hitting a record high US$8.12, surpassing the peak of US$7.99-3/4 set last July. New-crop December was down 0.2% at US$7.83, after hitting a contract high of US$7.99.

August soy rose 2% to US$17.19, after posting a record high US$17.46-1/2. New-crop November rose 1.6% to US$16.45, hitting a contract high of US$16.73-3/4.

 

Chicago September wheat rose 1% to US$9.17-3/4, peaking at a session high US$9.37-1/2, the highest in nearly four years. Wheat futures continue to remain in the shadow of the all-time high set in 2008 at above US$13 per bushel. The corn and soy crops remained in the grip of the drought, with traders now turning their focus on soy, which typically sets yields in August but the crop was planted at least two weeks earlier due to a mild winter. About 80% of the corn crop is pollinating, the crucial stage when yields are set.

 

"There is not a favourable weather forecast out there and now NOAA came out with the extended forecast that showed no relief for the next 30-60 days," said Shawn McCambridge, an analyst for Jefferies Bache.

 

"Corn is now pollinating in the north and that's where the drought is spreading so we're looking at more production losses," he said.