The biggest risk to US growth: further dollar rally

The biggest risk to US economic growth remains the possibility of an extended US dollar rally. The Fed rate hike expectations have been pushed out to December and many doubt that the Fed will hike right before the year end. That's because the hike will involve three rates: FF, IOER, and RRP and could be disruptive to money markets over the turn (year-end). That means if we don't get a hike in September, we may not see liftoff until 2016.

At least that's what the markets expect. But if the Fed unexpectedly hikes this summer, the impact on the markets could be severe. And the dollar is likely to rally further as a result.

We've seen what a strong dollar can do to US manufacturing employment.

Source: ISM, Investing.com

But there are other "unintended consequences". Consider for example US farming businesses and the banks that provide them credit. It's hard for US farmers to compete with Canadian, Australian, Ukrainian, and other foreign producers after those nations' currencies have been sharply devalued vs. the dollar. That's why grain prices, farms, and banks that lend to them are vulnerable to further US dollar strength.

Wheat futures (source: barchart)

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Can the rally in global commodities be sustained?

We are seeing broad improvements across global commodity markets. To be sure, commodity valuations are still at depressed levels relative to the past decade, but after a prolonged decline, broad indices seem to have stabilized.

CRB BLS broad commodity index (source: barchart)

The rally across a number of commodity sectors however resulted from a variety of factors, most of which are believed to be transient. For example the cold winter pushed up US natural gas prices (though exports could provide a floor - see post) and hot/dry conditions in Brazil sent coffee prices flying (see chart). Some argue that the two unusual weather patterns are related - a scary thought.

The Ukrainian crisis on the other hand pushed up wheat and corn prices.

WSJ: - Wheat prices rose as much as 6.8% before easing in midday trading. Wheat for March delivery at the Chicago Board of Trade settled at $6.26 a bushel, up 27 cents, the highest closing price in nearly three months.

May US corn futures (source: barchart)

Corn futures also gained from the Ukraine unrest, finishing at their highest price in more than five months. Corn for March delivery rose 6 cents, or 1.4%, to $4.64 a bushel in Chicago.

Ukraine grain exports continued Monday despite the unrest. However, looking ahead, grain buyers that would normally consider the country for grain shipments are largely turning elsewhere, three Europe-based traders who deal in physical grain supplies said Monday. The traders said difficulty obtaining financing due to the country's turmoil is slowing business for Ukraine-based grain companies.

Gold has also been recovering recently - up 12% for the year on slow Fed taper and better demand.

It's not clear if these higher prices across a number of commodities can be sustained. Slower growth in China (combined with weaker yuan) is not helping base metals such as copper for example. Many analysts are also quite bearish on crude oil. Should the geopolitical risks subside, we may get a correction there. Nevertheless we haven't had a commodities rally like this in quite some time.

SoberLook.com

From our sponsor:

Global wheat markets seem to be well supplied

US wheat futures fell to new lows today not seen since 2012. Some had hoped  wheat prices would stabilize as Egypt, the world's largest wheat buyer, entered the market.

WSJ: - Egypt's less-frequent purchases has been a reason why wheat futures were one of the worst-performing commodities of 2013, when they slumped 18% on the year.

Analysts are now optimistic that prices are low enough to mean the North African country will continue ramping up its purchases this year in a bid to avoid public discontent with food shortages.

At the weekend Egypt's state-owned wheat buyer, the General Authority for Supply Commodities, bought 535,000 metric tons of Ukrainian, Russian, French and Romanian origin wheat at an average price of $317 a ton. This is one of the North African country's biggest purchases in the international market in recent years, topping a 475,000-ton Black Sea order in September 2012 and a 420,000-ton purchase of Russian wheat a year before.

Another factor providing support for wheat in recent days has been the frigid weather in the US, which may pose risks to dormant wheat in the Midwest (see story).

Nevertheless the March-2014 CBOT wheat futures declined some 1.4% today.

March 2014 whet futures

It seems that increased production in Canada and Australia may keep the global markets well-supplied. Stronger dollar due to better than expected ADP employment report today (see story) is not helping overall commodity prices either.

Note: Here is an interesting article discussing how low wheat and corn prices could be damaging to some Republican candidates in the upcoming elections.

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From our sponsor:

Soy, corn futures spike on scorching Midwest weather

Here we go again. While the early part of the US Midwest summer has been fairly benign for crops, farmers' luck has run out in late August. The central part of the US is experiencing a broad heat wave, putting a number of crops at risk.

Source: Intellicast.com

After what happened last summer (see post), this is particularly an unwelcome development. Crop conditions have been decent through early August, but all that is about to change.

Corn crop conditions by years (source: USDA)

Agriculture.com: - Crop conditions in many key areas may be going from bad to worse in the next few days. Temperatures will scrape the triple-digits around the nation's center to begin this week. With the exception of a quick pass-through by a "weak cool front" bringing some spotty showers later in the week, the weather will remain hot and dry for the next week and a half or so, forecasters say.

Prices on soy, corn, wheat, and other grains spiked this morning as a result - with the soy crop being particularly vulnerable at this stage. Here are the most active contracts for corn and soy.

Source: barchart

This does not bode well for emerging economies who import some of these products and have recently experienced significant currency depreciations.

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From our sponsor:

Hedge funds hurt by drop in corn, wheat prices, but the decline may be short-lived

Agricultural commodities got slammed last week as a result of two news items.

1. Corn planting acreage is expected to hit the highest level since 1936. With supplies low and prices expected to stay firm, farmers are planning to expand the number of acres used for corn. This points to an immense flexibility of the US agricultural economy.

Farm Futures: - The Farm Futures survey of more than 1,750 growers found farmers ready to plant 97.43 million acres of corn, up .3% from 2012. If achieved, the total would be the most since 1936.

The increase in soybeans could be even more dramatic. Farmers said they want to plant 79.09 million acres this spring, up 2.5% from 2012 and easily an all-time record if achieved.

2. While corn supplies are materially lower than last year, the latest USDA data showed stocks did not decline as quickly as expected. Apparently the demand for animal feed has been relatively weak.

Farm Futures: - May corn futures dropped their daily 40-cent limit this morning, after USDA shocked the market once again with a March 1 grain stocks number that showed much bigger supplies than expected.

At 5.399 billion bushels, inventories are down 10% from a year ago. The government's estimate was above even the forecast from Farm Futures survey, the largest pre-report estimate in the market, and almost 400 million bushels above the average trade guess.

The data suggests lower than expected corn feeding during the second quarter of the marketing year and perhaps greater 2012 crop production as well. Wheat stocks of 1.234 billion were also greater than expectations, implying less wheat was also fed than traders anticipated.

Anecdotal evidence suggests that a number of hedge funds got caught being long corn and were forced to unwind. CFTC data shows speculative net positions in corn as of 3/26 at the highest level (net long) for the year.

Speculative corn net contracts (source: CFTC)

The unwind forced a violent selloff across agricultural futures, particularly corn - hitting daily down-limit.

May corn futures (source: Barchart.com)

With speculative players licking their wounds, some agricultural commodities may present a good investment opportunity. Here are some reasons the selloff in corn may be short-lived after the market digests the news.

1. Demand for soybeans from China may yet encourage a shift from corn and wheat acreage into soy. It won't take much of a shift to send prices higher.

Farm Futures: - "With stocks of both corn and soybeans projected near historic lows, strong acreage this spring is a must to rebuild inventories," says Farm Futures Senior Editor Bryce Knorr, who conducted the research. "... Some 18% of those surveyed said they could still shift 50% or more of their acres."

2. South American crops are expected to remain moderate, as logistics and weather have curtailed significant crop improvements.

3. The US may be in for another 2012-style drought in 2013.

Inside Climate News: - Drought conditions in more than half of the United States have slipped into a pattern that climatologists say is uncomfortably similar to the most severe droughts in recent U.S. history, including the 1930s Dust Bowl and the widespread 1950s drought. 

Source: U.S. Drought Monitor

The 2013 drought season is already off to a worse start than in 2012 or 2011—a trend that scientists at the National Oceanic and Atmospheric Administration (NOAA) say is a good indicator, based on historical records, that the entire year will be drier than last year, even if spring and summer rainfall and temperatures remain the same. If rainfall decreases and temperatures rise, as climatologists are predicting will happen this year, the drought could be even more severe.

The federal researchers also say there is less than a 20 percent chance the drought will end in the next six months.

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From our sponsor:

Could the rise in CO2 levels play havoc with global food supplies?

Goldman recently published a report discussing global carbon emissions (see discussion on cap & trade issues). Apparently the amount of carbon in the atmosphere now is the highest in over 400,000 years (chart below). Researchers use small air bubbles trapped in the antarctic ice sheets over time to determine historical carbon (CO2) levels.

X-axis = number of years ago (source: GS)

It is difficult to determine what impact this is having on global weather patterns, but between last July being the hottest month on record (since record-keeping started in 1895), and Hurricane Sandy veering inland due to irregular jet stream patters, people are beginning to take this more seriously.

In particular the impact on global food supply is a concern because the loss in yield during "bad" years is not recovered during periods of favorable weather (see chart below - this pattern resembles the P&L of a short options portfolio). It means that if what happened this past summer becomes a more frequent occurrence, the impact on global food supplies could be devastating.

Historical corn yields (source: GS)

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From our sponsor:

Ethanol industry struggling; saved by the Obama administration

Ethanol producers got a reprieve from the Obama administration, as the requests to halt ethanol blending were denied.

Businessweek: - Ethanol’s discount to gasoline narrowed after the Obama administration rejected requests to waive requirements for blending the fuels.

Ethanol rose 1.6 cents, or 0.7 percent, to $2.351 a gallon on the Chicago Board of Trade, contracting the additive’s discount to gasoline to 35.91 cents a gallon from 36.12 cents yesterday, based on December futures prices. Gasoline’s premium was 99.8 cents on Sept. 28.

As it is, ethanol producers are losing money this year due to elevated corn prices (see discussion). Production is down 14% from last year, which is showing up in declining ethanol inventories.

Source: EIA

Without this support from the Obama administration, ethanol firms would have been decimated. But regulation is keeping this industry alive - for now.

Businessweek - Based on December contracts for corn and ethanol, producers are losing 29 cents on each gallon of the fuel made, up from 28 cents yesterday, excluding the revenue that can be made from the sale of dried distillers’ grains, a byproduct of ethanol production that can be fed to livestock, data compiled by Bloomberg show.

Ethanol companies would have been decimated if the EPA granted the waiver request, Kitt said. “You could really hurt the market here,” Kitt said. “It would wipe you out.”

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What happens to non-ethanol corn

What happens with all the corn that is not used for ethanol or animal feed? Many think it's used to make cereal and corn chips. But that turns out to be only 14% of all the non-ethanol corn usage. The biggest portion by far (36%) is used to make high-fructose corn syrup (HFCS). And much of HFCS is used for carbonated soft drink manufacturing. That means we should see soda prices in the supermarket continue to rise - which may be a good thing in terms of consumer health.

Here are all the non-ethanol uses of corn.

Non-ethanol corn usage (source: DB)

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Uncertainties about South American harvests are keeping global grain prices elevated

In spite of promises of record wheat and corn harvests in South America (discussed here), grain prices continue to stay elevated.

May 2013 wheat futures (Source: Barchart)

All eyes are on the soy, corn, and wheat sowing in the Southern Hemisphere, as buyers of agricultural commodities expect these spring crops to replenish the supplies lost to the summer's drought. But is it possible that the South American harvests will be worse than expected? That certainly seems to be the case with respect to Argentina.

Reuters: - Argentina's upcoming wheat harvest is expected to shrink 17 percent from last season, the Agriculture Ministry said on Thursday, as farmers skirt government export curbs by shifting to other crops.

The forecast drop to 11.5 million tonnes is bad news for consumer nations looking to Argentina to help make up for thin supplies caused by droughts in bread basket producers such as the United States, Russia and Australia.

In its monthly crop report, the Argentine ministry stuck by its view that 3.7 million hectares were sown with wheat in the current crop year, down 20 percent from the 2011/12 season.

Farmers have shied away from wheat to avoid export limits that do not apply to Argentina's main agricultural export, soy, which will start being planted this month and could be headed for a record year.

Furthermore, at least so far, the weather in many parts of South America has not cooperated - one uncertainty that all harvest forecasts can not fully incorporate.

Agrimoney: - Prospects of South America replenishing world corn supplies are taking a dent from excessive rains which are delaying plantings, and mean that the crop has got off to a "below average start".

The Buenos Aires grains exchange on Thursday said that the pace of corn sowings in Argentina, the second-ranked exporter, had slowed to 6.9% of area in the last week, leaving 32% of corn planted.

That is 11 points, equivalent to some 370,000 hectares, behind the average pace.

"Planting of commercial corn has slowed due to continuous rainfall that has been recorded over much of the agricultural area," the exchange said, flagging amounts of up to 300mm (12 inches) in some areas.

As discussed before (see post), elevated food prices over a prolonged period of time will generate more uncertainty and even civil unrest in emerging markets nations. The risks of food inflation (which can have a strong impact on inflation expectations) in some countries will also prevent central banks from shifting to a more accommodative policy during periods of slow growth (see post).

SoberLook.com

It's not just about corn: world food prices jump 10 percent

In July after the post on the drought conditions causing food inflation globally (see this discussion), we've gotten a number of comments stating that it's a North American problem. In particular emails from India and the Middle East stated adamantly that many poor regions of the world rely more on rice - therefore corn prices in the US would not be an issue. The statement about rice is in fact correct. But it's not just about corn (see discussion on soy), and stable rice harvests are not going to prevent global food inflation that is threatening a number of nations. Unfortunately it will be the poor communities that will be hit the hardest.

Reuters: - World food prices jumped 10 percent in July as drought parched crop lands in the United States and Eastern Europe, the World Bank said in a statement urging governments to shore up programs that protect their most vulnerable populations.

From June to July, corn and wheat prices rose by 25 percent each, soybean prices by 17 percent, and only rice prices went down, by 4 percent, the World Bank said on Thursday.

Overall, the World Bank's Food Price Index, which tracks the price of internationally traded food commodities, was 6 percent higher than in July of last year, and 1 percent over the previous peak of February 2011.

Let's just hope that our friends on the FOMC are keenly aware of this situation and consider the full ramifications of their actions.

SoberLook.com

The soy price shock in the US will reverberate across China

The Chicago Board of Trade soy futures hit a new record Sunday evening as attention now shifts from corn to soy. Traders are coming to the realization that soy supply may not last long enough to be replenished by crops from South America.

Bloomberg: - “Corn was the story going into the crop tour and now soybeans are the story after leaving the fields this week,” Peter Meyer, a senior director of agriculture commodities at PIRA Energy Group in New York, said in an interview in Owatonna, Minnesota, after completing his sixth Pro Farmer tour. “Mother Nature shut down the soybean crop well before it reached its potential. The U.S. may run out of soybeans before the start of the South America harvests in February.”

Soy nearby contract (Bloomberg)

Again, a number of analysts continue to argue that the North American drought should not have a significant impact on Asia. That is just not true. Some economists simply don't appreciate just how global agricultural markets have become.

Bloomberg: - China, the world’s largest buyer and consumer, purchased 165,000 metric tons of soybeans and 55,000 tons of soybean oil from the U.S., the USDA reported yesterday. China may import a record 59.5 million tons of soybeans in the year that begins Oct. 1, the agency said Aug. 10.

World soybean supplies may shrink by 33 million to 35 million tons in September to February, compared with a year earlier, forcing China to reduce imports by 4 million tons, researcher Oil World said Aug. 21.

Tight global supply of soy will translate into government subsidies and/or food inflation in China and elsewhere in Asia. Fear of food inflation is one of the reasons China has not been as aggressive with its stimulus programs in spite of slowing economy. Here is a quote from the LA Times that describes how these skyrocketing soy prices will reverberate across China.

LA Times: - Construction laborer Yi Jichun has never heard of Illinois or Iowa. But the migrant worker's favorite comfort food comes straight out of the U.S. Midwest: soybean oil.

The world's biggest consumers of edible oils, Chinese households have developed a taste for the stuff that would make a county fair fry cook proud. Be it a simple stir-fry, poached fish or deep-fried pork ribs, many Chinese diners love their grub covered in an oily sheen. Jugs of the golden liquid make popular gifts for Chinese New Year.

"Without the oil, it would taste too plain," Yi said as he tucked into a lunch of sliced cucumbers and chicken drumsticks slathered with grease. "I wouldn't want to finish it."

And that has officials in Beijing worried. The worst U.S. drought in half a century is sending global grain prices soaring. The fallout is almost certain to be felt at dinner tables across China. The No. 1 foreign buyer of American soybeans, which are pressed into cooking oil and used for animal feed, China last year purchased about half of U.S. exports, more than $10.4 billion worth, according to the American Soybean Assn. China has also stepped up purchases of U.S. corn and wheat to feed the nation's growing appetite.

Poor U.S. harvests could fuel Chinese food inflation and social discontent. China has already begun tapping its grain reserves to ensure price stability. The government has ordered the nation's biggest cooking oil producers twice in recent months to keep their prices in check. And it's scouring the globe for alternative supplies.

It won't be easy. More than two-thirds of cooking oil consumed in China comes from soybeans, and most of those soybeans are supplied by the U.S., according to Ma Wenfeng, an analyst with Beijing Orient Agribusiness Consultant Co. For now, Chinese consumers are bound to the fortunes of farmers in the American heartland.

"Soybean oil is the most important edible oil in China ... which makes us vulnerable to the drought" gripping the U.S., Ma said.

SoberLook.com

Europe not insulated from agricultural commodities shock

Some readers have commented that Europe is unlikely to be impacted as dramatically by the North American drought conditions and rising agricultural commodity prices as the US. But in these markets a local exogenous shock quickly becomes a global one. And this year the shock was actually global to begin with as crop damages, though most severe in north America, have been seen around the world. Given the recession in the Eurozone, the area is particularly vulnerable to these price increases.

Meanwhile prices continue to rise. The US agricultural commodities hit new records today.

Reuters: - Soybeans rallied 2.5 percent on Tuesday to hit another peak, while corn rose nearly 2 percent on evidence that the worst drought in half a century has shrunk the crop and that demand must be tempered through even higher prices.

Corn and soybean futures at the Chicago Board of Trade resumed their climb after a setback last week, making a push to retest record highs as money managers bet that end-users would scramble for the dwindling supplies.

Chicago wheat rose more than 2 percent in tandem with corn and soybeans and on a sharp drop in the dollar amid growing expectations that European officials will put together a plan to tackle the region's debt and economic crisis.

US corn futures

But things are not much better in Europe. Here is the price of corn (futures) traded in Paris. This spike is not just due to arbitrage opportunities with the US corn prices, but also to poor crop conditions in southern and eastern Europe.

NYSE Liffe Corn futures (euros per tonne)

The fact that the French wheat harvest is expected to be decent this year is not helping matters, as prices are driven by global fundamentals and livestock feed substitution (farmers substituting wheat for corn). Substitution has driven feed wheat price in London to new highs.

NYSE Liffe Feed Wheat futures (GBP per tonne)

As much as some in Europe think they are insulated from this food price shock, the futures markets are telling a different story.

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Drought showing up in steepening of hogs and cattle forward curves

Some readers may have a bit of trouble with this post, but these are the realities of the marketplace. The current spike in corn prices is already making its way into the forward prices for meat products. Cattle and hogs markets are pricing in the impact of higher feed costs cutting into margins. Cattle ranchers are also affected by the drought destroying pasture. Ranchers will be cutting herd numbers, sometimes simply because there is no fresh grass, while hay supplies are running low. Keeping barns sufficiently cool has also been a problem with misters and fans running full blast. As the stored feed begins to run out, cattle and hogs liquidation begins. Cattle sale barns are booked weeks in advance these days.

Reuters: - Cattle ranchers and hog farmers have been culling their herds because of high feed costs, scorched pasture and increased hay prices brought on by the drought.

This could result in a near-term boost to meat supplies and possible lower prices, but consumers might have to fork out more for meat next year when cattle and hog supplies tighten.

With the expectations of reduced supply in 2013, the futures curves for lean hogs and live cattle have steepened materially.

Source: JPMorgan

SoberLook.com

Crop damage sending agricultural commodity prices to new highs

Crop conditions across the US are still deteriorating, with less than a quarter of the corn crop now in "good or excellent" conditions.

Percentage of corn crops in "good or excellent" conditions

What's even more troubling is that the weather is not cooperating. The National Weather Service forecast for the continental US over the next 1-2 weeks looks dreadful. The precipitation levels...

Precipitation 8-14 Day Outlook (source: NOAA/ National Weather Service)

... and the temperature are both expected to be significantly worse than historical averages. This is threatening to cause further crop damage.

Temperature 8-14 Day Outlook (source: NOAA/ National Weather Service)

On the back of these weather forecasts and crop damage estimates, agricultural commodity prices are hitting records again.

Bloomberg: - Corn surged to a record, heading for the biggest monthly gain since 1988, as the worst drought in at least a generation lingered in the U.S., threatening yields in the world’s biggest grower and exporter. Soybeans and wheat also rallied.

Corn futures for December delivery climbed 2.5 percent to $8.1275 a bushel on the Chicago Board of Trade, after touching an all-time high of $8.1725. The most-active contract has surged 28 percent in July.

Soybean futures for November delivery gained 2.6 percent to $16.4375 a bushel on the CBOT. The oilseed, which reached a record $16.915 on July 23, is up 15 percent in July. Wheat futures for September delivery rose 1.8 percent to $9.14 a bushel in Chicago. The grain, which can replace corn in livestock feed, has surged 21 percent this month.

Corn nearby futures contract  (source: Bloomberg)

And as discussed before, high food prices are already propagating through emerging markets economies.

The Times of India: - It's not only the prices of staples, edible oils and vegetables that have been rising. Prices of eggs and chicken (protein food items) may also rise in the coming months. Scanty rainfall and higher global prices have led to a huge increase in average prices of poultry feed in the country, which is also an early indicator of the potential impact a drought may have on food inflation.

Average prices of poultry feed - consisting of oilseed cakes, rice bran, grounded maize and soya - rose by 69% year-on-year in July up from 18% in June, due to lack of rainfall and higher global prices, a Nomura research says. These price increases outpaced those during the 2009 drought. Feed is a key input in poultry farming, and this sharp price increase suggests that prices of eggs and chicken (protein food items) may rise sharply in the coming months, the note adds.

This is a dangerous development for two reasons. We will see more civil unrest across emerging markets - particularly in the Middle East. Also the large emerging markets nations (and some developed nations as well) will be unable to stimulate their economies effectively because of inflationary concerns,  resulting in a significant hit to global growth.

SoberLook.com

Relentless rise in food prices already showing up in inflation indicators

Agricultural commodity futures prices continue to march higher in response to one of the worst North American droughts in decades. It has become clear that the genetic engineering technology developed to help crops better withstand drought will be ineffective against these weather conditions. Efforts to stabilize crop yields in many areas have failed.

Wheat

Soy

Corn

Some analysts have pointed out that it may take time before these elevated food prices feed through into the CPI measures. But in the fast moving global markets an exogenous shock of this magnitude propagates quite quickly.

Bloomberg/BW: - Brazil’s inflation unexpectedly accelerated this month, reinforcing investors’ bets that the central bank will soon end a cycle of interest rate cuts that has taken borrowing costs to a record low.

Consumer prices as measured by the IPCA-15 price index rose 0.33 percent in the month through July 13, exceeding all 42 analyst estimates in a Bloomberg survey whose median forecast was for a 0.18 percent increase. The annual inflation rate accelerated for the first time in 10 months to 5.24 percent, the national statistics agency said in Rio de Janeiro today.

Brazil IPCA-15 price index (YoY)

And at least a portion of this shock was clearly driven by rising food prices.

GS: - The food-driven supply price shock and the fading impact of tax cuts on the purchase of durable goods interrupted the ongoing deceleration of yoy [Brazil] inflation. This is likely to be noticed by the central bank and adds weight to the view that the current easing cycle is now approaching the end.

As discussed before, this is a dangerous development for a couple of reasons:

1. Food inflation will prevent emerging markets nations's central banks from stimulating their economies in an environment of a global slowdown. This could lead to stagflation that impacts global growth.

2. Food inflation was a major contributor to the "Arab Spring" movement and will have a destabilizing effect on a number of economically strained nations that depend on food imports (including Iran).

SoberLook.com

Crop situation getting worse

Crop conditions in the US, particularly corn, continue to worsen. The latest data from the USDA puts the percentage of corn crops in "good or excellent" condition at just above 30%.

Percentage of corn crops in "good or excellent" conditions

The only time we've been lower on crop conditions in recent decades was during the 1988 drought (see this link for more background on droughts). However the current drought is by no means over and we may be going considerably below 30% on the chart above.

8-14 day temperature forecast (source: National Weather Service)

The chart below compares conditions to crop yields over time (with 2012/13 added). Based on the current situation, crop yields could easily be down 25% or more.

Source: DB

As the markets recognize this potential size of the supply disruption, prices continue to march higher, with corn hitting another record today.

Nearby corn futures

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Commodity markets discounting hopes for genetically engineered crops

Corn futures hit another record on Friday as the drought situation across the US becomes more dire.

Reuters: - Chicago corn rose for a second straight day on Friday, extending its drought-driven rally over four weeks to 45 percent, with little relief expected for the crop which has been hit by the worst drought in the U.S. grain belt in 25 years.

Corn nearby futures contract

Lubbock Avalanche-Journal: - Almost a third of the nation’s corn crop has been damaged by heat and drought, and a number of farmers in the hardest hit areas of the Midwest have cut down their crops just midway through the growing season.

The damage is not limited to corn, as other major agricultural commodities undergo similar shocks.

Wheat nearby futures contract

Soy nearby futures contract

There is still hope that some crops, genetically engineered to withstand drought, could be salvaged.

SFGate: - "All these hybrids that have been produced in the last few years are built for drought tolerance so we have a little more hope that they will be able to withstand some of this heat, more so than they would have say 10 years ago," said Garry Niemeyer, who grows corn and soybeans in Auburn, Ill., and is president of the National Corn Growers Association.

He said plants have been developed with a larger root mass, which allows them to reach deeper for water and hold more in reserve. Certain varieties also are capable of rolling up their leaves to slow moisture loss.

But the commodity markets are skeptical (with futures hitting new highs) because even the best genetic engineering can't help the situation when there is no rain and high temperatures persist for weeks.

SFGate: - Corn plants today withstand drought better than they did in 1988, but no variety exists that can produce significant yields without rain for six weeks and sustained temperatures above 100 degrees, said Tony Vyn, an agronomy professor at Purdue University.

"You get to the point where the water shortage is so severe that technology is not going to guarantee yield, even when you might have that expectation," he said. "My experience thus far is that drought-tolerant hybrids are no silver bullet."

Source: The Weather Channel

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Farmers "thinking of chopping their corn up and feeding it to cows"

The drought conditions in the US are continuing to create havoc for crops. Corn in particular has been hit hard.

Reuters: - "There are a lot of people thinking of chopping their corn up and feeding it to cows," said University of Missouri Professor of Plant Sciences William Wiebold.
...
The condition of the U.S. corn crop has deteriorated quickly after a record-fast planting buoyed hopes of a bumper crop this fall in the world's largest exporter of grains.

Crop ratings have fallen to their lowest level in 24 years, with the U.S. Agriculture Department's most recent estimate pegging the crop as just 40 percent good to excellent.

The government sharply reduced its expectations for the crop on Wednesday, cutting its yield forecast by 20 bushels per acre, or 12 percent in its monthly crop report. If realized, the yield estimate of 146 bushels per acre would be the lowest since 2003.

Percent of corn crops in "good" or "excellent" conditions (source: USDA)

It is important to note that elevated corn prices will impact numerous other agricultural and even non-agricultural commodities. Food inflation could be a serious issue.

The Kansas City Star: - A punishing Midwest drought may lead to food inflation as the cost of corn soars and the price of a key feedstock for ranchers rises. Experts warn it could mean higher costs for everything from a hamburger to a gallon of milk in the months ahead.

And as difficult as it may be for the US consumer, this will cause serious problems in some developing nations where food costs are a much larger proportion of household income. This is particularly problematic because the US produces 40% of the global corn crop.

SoberLook.com

56 percent of the United States in drought conditions

Drought conditions in the US continue to persist. Here is the latest drought forecast map from the NOAA:

CBS News: - The United States is parched, with more than half of the lower 48 states experiencing moderate to extreme drought, according to a report released today (July 5).

Just under 56 percent of the contiguous United States is in drought conditions, the most extensive area in the 12-year history of the U.S. Drought Monitor. The previous drought records occurred on Aug. 26, 2003, when 54.79 percent of the lower 48 were in drought and on Sept 10, 2002, when drought extended across 54.63 percent of this area.

The Midwest in particular is getting hit hard, sending corn futures to yet another record yesterday. As discussed before, this is impacting agricultural commodity prices globally, with some nations expected to face food inflation.

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Corn prices break above the 2008 highs

The drought across the US continues to cause havoc, driving agricultural commodities prices higher. Corn futures hit a record today, exceeding the 2008 highs.

Corn futures

Reuters: - The hot, dry weather prompted analysts to reduce corn yield estimates, pointing to a smaller crop in the world's No. 1 grower than had been expected. In a Reuters poll Tuesday - the day after the U.S. Department of Agriculture (USDA) reported on crop conditions - analysts on average pegged the U.S. corn yield at 153.4 bushels per acre, down from 157.3 bushels a week ago.

The USDA on Monday slashed its condition rating for U.S. corn to 48 percent good-to-excellent, down 8 percentage points from a week earlier. It pegged the soybean crop at 45 percent good-to-excellent, compared with 53 percent a week ago.

The forecasters are predicting some relief from the heat wave coming soon, but the damage may already have been done. As the chart below shows, corn crop conditions have deteriorated rapidly in recent weeks and the futures prices are reflecting it.

Corn: percentage of crops in "good" or "excellent" conditions (source: USDA)

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