Gauging The Effects of the 2012 Drought (Source:CME)
One of the worst U.S. droughts in 50 years is striking the Midwest, withering crops in their fields and sending corn and soybean futures to all-time record price highs.
The Midwest experienced some of the driest Junes and Julys in history and the abnormally high temperatures and low rainfall may continue into autumn. The National Weather Service said in mid-July that the normal temperatures and below-normal precipitation could persist from August through October. The worst of the adverse weather is in the eastern Midwest, but several market watchers said if the conditions persist, this could spread to the western Midwest, too.
That means farmers and traders will likely be dealing with the weather market for a while, possibly until harvest. That could mean volatile price action so both market users need to be nimble.
Ken Morrison, founder and editor of online commodities newsletter, Morrison on the Markets, remembers the last big weather market for grains was the year most people use to compare to this year – 1988.
“The behavior is similar,” he says. “I was trading. I was in charge of Cargill’s minor grains trading – oats, grain-sorghum and barley. In 1988 it was just as volatile. That year, oats went premium to corn. It was one of the wildest summers we had. In that degree (minor grains) it was wilder and more volatile than even this market.”
That volatility means traders need to be cautious. He explains: “Most traders are just trading smaller sizes, not changing their strategies. Whenever volatility gets like this it happens. If you usually trade a 50-lot before, now you trade five lots. That’s pretty common.”
What Now?
Mike Zuzolo, president, Global Commodity Analytics and Consulting, advises farmers how to hedge their agriculture production. Zuzolo is in Lafayette, Ind., in the heart of the worst of the drought for that state. Because of the intensity of the dryness, he urges his clients to focus on their local cash basis and be in contact with their grain elevator. Specifically, he tells them not to be in a hurry to lock in basis, especially if their test yields are coming in lower than expected. Basis is the difference between the futures price and local cash grain prices.
“First call your wife, then call your elevator, because everyone is probably going through the same scenario… If the reports are as bad … the elevator is going to have to raise basis calls in order to get grain,” Zuzolo says, adding that farmers need to review their crop insurance options to help limit downside risk.
He says in a ballpark estimate, some Indiana fields may see 70 percent to 80 percent loss.
Iowa farmer Pam Johnson, who farms 1,200 acres with her husband in Floyd, Iowa, divides her acreage between corn and soybeans. While not nearly as damaged as some crops east of the Mississippi river, her fields are under stress. Johnson, who is also first vice president for the National Corn Growers Association, says since June, Iowa corn crops have received a fraction of the one inch per week rain that corn needs to have optimal yield.
In June, Iowa crops received 1.55 inches for the month and as of July 19, they received seven-tenths of an inch. Her corn crops are done pollinating – and they pollinated under severe heat stress – so there’s little that can help boost yield at this point. Johnson said she’s expected yields to be down at least 10 percent this year.
“The beans, too, they’re suffering, but if they get rain soon they could recover,” she says, adding that soybeans have not pollinated yet. Pollination is when crops set yield.
“No Bowl of Cherries” for Livestock
Grain farmers have been the focus of this year’s drought, but cattle farmers are facing more problems – both high grain prices and stressed animals because of the heat.
“It’s really hard on them (the cattle),” says Lester Aldrich, a broker at Zia Commodities, a private ag consultancy with cattle clients in Texas and Kansas. “You can just see it on them when they get off the trucks. They’re hot, they’re tired, they’re thirsty.” He adds that heaviest-weight cattle can sometimes fall ill just before slaughter. So far, though, there are few reports of death losses, he says.
Feedlot operators who have no hedges are likely losing anywhere from $150 to $250 per head because of the price of corn has jumped nearly 50 percent from mid-June to mid-July. “The breakevens for cattlemen are just awful,” Aldrich says. “It’s just the pits. There’s no bowl of cherries for them at all.”
For farmers looking to hedge 2013 production or for traders looking to put on longer-dated trades, Morrison says, wait: “Fundamentally I find it difficult to short the back months because of the big discount to the front months. You never know how the front months will correct.”
Pro Farmer: After the Bell Wheat Recap(Source:CME)
Wheat futures saw choppy trade today and heavily favored the downside into the close. Chicago wheat ended 1 1/4 to 19 1/4 cents lower; Kansas City wheat closed mostly 6 3/4 to 14 cents lower. Minneapolis wheat futures ended with losses in the teens to 20s. Nearby contracts led losses at all locations. Wheat futures need strength in the corn market to rally; when that faded this morning, wheat futures also softened. Adding incentive to take profits was a disappointing weekly export sales tally of 367,000 metric tons (MT) for 2012-13.
Wheat Market Recap Report (Source:CME)
September Wheat finished down 19 1/4 at 884, 20 1/2 off the high and 10 1/4 up from the low. December Wheat closed down 17 3/4 at 897 1/4. This was 10 1/4 up from the low and 19 1/4 off the high. September Chicago wheat traded sharply lower into the close with KC and Minneapolis following. The wheat complex is still uncertain as to how low Russia wheat production really is. This has sparked rumors that Russia may enact export restrictions, however local analysts believe supply is healthy enough to withstand this type of action. The Russian Agricultural Ministry estimates their 2012 grain harvest at 80-85 million tonnes which is unchanged from prior forecasts. The wheat market set aside the Russian news and followed corn lower on the day. The Wheat Quality Council wrapped up their US Spring Wheat crop tour today and pegged the US yield at 44.9 bushels/acre vs. 41.5 bushels/acre in 2011. Export sales were disappointing this morning with Net weekly export sales for wheat, came in at 367,000 metric tonnes for the current marketing year and none for the next marketing year. Traders were expecting sales near 500,000 tonnes. As of July 19, cumulative wheat sales stand at 25.7% of the USDA forecast for 2012/2013 (current) marketing year versus a 5 year average of 30.0%. Sales of 536,000 metric tonnes are needed each week to reach the USDA forecast. September Oats closed down 3 1/4 at 369 1/2. This was 3 1/2 up from the low and 2 1/2 off the high.
Pro Farmer: After the Bell Corn Recap(Source:CME)
Corn futures ended low-range with the September and December contracts down 13 1/4 and 11 3/4 cents, respectively. Other contracts posted losses of 4 to 9 cents. Corn futures enjoyed slight gains this morning thanks to a sharply weaker U.S. dollar index and recognition recent and forecast rains will at best stabilize the crop. But spillover from soybeans and net sales reductions for the 2011-12 and 2012-13 marketing years in this morning's Weekly Export Sales Report that signal high prices have reduced export demand gave bears the advantage.
Corn Market Recap for 7/26/2012(Source:CME)
September Corn finished down 13 1/4 at 781 1/4, 18 1/4 off the high and 5 up from the low. December Corn closed down 11 3/4 at 776 1/4. This was 5 1/4 up from the low and 17 1/4 off the high. December corn traded sharply lower into the closing bell. The lower trade is linked to showers that moved across the US Midwest overnight and this morning plus very poor export sales. The corn market is struggling to find new buyers as signs of demand destruction are beginning to show up. The showers provided slight relief to soil moisture and some corn acreage. Temperatures are expected to cool over the weekend but another ridge is expected to set up in the western Midwest by next week. Warm and dry weather is expected in the central and western Midwest with a better chance for showers and cooler temperatures in the northern and eastern Midwest. Net weekly export sales for the week ending July 19th came in at -9,100 tonnes for the current marketing year and -131,300 tonnes for the 2012/13 marketing year for a total of -140,400. The negative sales were due to Chinese corn cancelations. Cumulative corn sales stand at 96.3% of the USDA forecast for 2011/2012 (current) marketing year versus a 5 year average of 99.2%. Sales of 240,000 metric tonnes are needed each week to reach the USDA forecast. Outside markets were supportive today but the technical sell signals were hard to overcome. September Rice finished down 0.185 at 15.38, 0.12 off the high and equal to the low.
GRAINS-Soy falls 2 pct on Midwest rain forecast, wheat down
SINGAPORE, July 26 (Reuters) - Chicago new-crop soy slid 2 percent weighed down by forecasts of rain in parts of the U.S. Midwest which is likely to offer some relief to the drought-hit crop, while corn lost almost 1 percent.
"In terms of the outlook for soybeans, there is still chance to improve with rain forecast but for corn what is done is done," said a Melbourne-based agricultural commodities analyst.
India's scant rains won't hit rice, cane output-Food Min
NEW DELHI, July 26 (Reuters) - India's rice and cane production are not expected to be hit by the poor monsoon rains, Food Minister K.V. Thomas said on Thursday.
India, the world's second biggest producer of rice and sugar, is implementing contingency plans as rains in the current monsoon season are around 22 percent below average.
India ministers to meet on drought-Farm Minister
NEW DELHI, July 26 (Reuters) - India's farm minister raised the prospect of drought for the first time this year, saying on Thursday officials would discuss next week the so-far meagre monsoon rains that are key to the economy of this major consumer and producer of food crops.
Farm Minister Sharad Pawar said members of the Empowered Group of Ministers (EGoM) on drought would meet as early as Tuesday for the first time since 2009, which saw the driest monsoon in nearly four decades.
Drought-hit corn overshadows good crops in Illinois
CORALVILLE, Ill., July 25 (Reuters) - The corn crop in central and western Illinois showed lower yield potential than last year as the worst U.S. drought in decades eroded grain production in the country's second largest corn growing state, scouts on a crop tour reported on Wednesday.
Corn in the typically high production areas of the state was under clear stress from temperatures that reached the triple-digits Fahrenheit at midweek, with leaves on many plants dried and brittle.
Vietnam Jan-July rice exports dip 2 pct on year
HANOI, July 26 (Reuters) - Vietnam's rice exports between January and July eased 2 percent from the same period last year to an estimated 4.62 million tonnes as key buyers the Philippines and Indonesia cut purchases of the grain, the Agriculture Ministry said on Thursday.
Rice export revenues in the seven-month period also fell an estimated 8.7 percent from a year ago, to $2.12 billion, the ministry said in its monthly report for July.
Spring wheat in northwest North Dakota above average-U.S. tour
DEVILS LAKE, North Dakota, July 25 (Reuters) - Favorable growing conditions should result in above-average yields for the U.S. spring and durum wheat crops in northwest North Dakota, scouts on an annual crop tour said Wednesday.
Wheat in northern North Dakota benefited from timely rains after planting in April and adequate moisture this summer even as a historic drought ravaged corn and soybean crops farther south, in the core of the Corn Belt.
Vietnam quickly running down coffee stocks -assoc
HANOI, July 26 (Reuters) - Vietnamese coffee farmers have been selling their crop quickly in the 2011/2012 season, meaning no stocks are likely to be brought forward for loading in the first period of the next crop year, an industry official said on Thursday.
Low stocks in Vietnam, the world's second-largest producer after Brazil, before the next harvest picks up, could boost robusta prices.
Big US crop insurers say losses manageable despite drought
July 25 (Reuters) - Two of the largest crop insurers in the United States played down concerns over the financial impact of the worst drought in more than 50 years, saying they expected only modest losses even as claims rise to record levels.
Wells Fargo's RCIS and Ace Ltd's Rain & Hail and said this week that between careful underwriting and reinsurance, they could handle what many expect to be billions of dollars in total payouts for crop losses this year.
Drought still stressing US crops despite showers
CHICAGO, July 25 (Reuters) - Rainfall this week and more rain for the next 10 days will boost crop prospects in the northern and eastern U.S. Midwest, but crops in the rest of the growing region will still struggle against extreme heat and drought, an agricultural meteorologist forecast Wednesday.
"There is improvement in the north and east, and we expect more showers today and tomorrow in the west central to northwest," said Don Keeney, meteorologist for MDA EarthSat Weather.
SOFTS-Sugar slips as Brazil harvest progresses, cocoa up
LONDON, July 26 (Reuters) - Sugar futures fell as Brazil's harvest picked up pace and weather conditions in India improved, while cocoa and coffee edged higher. Sugar futures dipped in early trading following higher than expected sugar production data from Brazil's industry association on Wednesday and forecasts for improving monsoon rains in key producer India.
Mexico 2012/13 sugar crop seen up 5 pct yr/yr-cane union
MEXICO CITY, July 25 (Reuters) - Mexico's national cane growers union said on Wednesday the coming 2012/13 sugar harvest, which begins in November, will reach 5.3 million tonnes, a 5 percent jump from the current cycle that ended this month.
Mexico produced 5.048 million tonnes of sugar in the 2011/12 season, said Carlos Blackaller, the head of the union that groups cane farmers across the country.
Brazil's sugar mills at full throttle in early July
July 25 (Reuters) - Brazil's center-south cane mills kicked into high gear in early July after rains receded, producing more sugar and ethanol than a year before for the first time this season, the milling industry association Unica said on Wednesday.
Although cumulative sugar output since the start of crushing in April remains 22 percent behind last year, mills churned out nearly a third of the total sweetener produced so far this season in the first two weeks of July, Unica said.
Sugar Traders Most Bearish Since April on Brazil: Commodities (Source:Bloomberg)
Sugar traders are the most bearish in three months on speculation that drier weather will accelerate harvesting in Brazil, the world’s largest producer. Ten of 16 analysts surveyed by Bloomberg said they expect raw sugar to drop next week and three were bullish. A further three were neutral, making the proportion of bears the highest since April 13. Sugar output in Brazil’s center south, the biggest producing region, rose 2 percent in the first half of this month, industry group Unica said July 25. Cane-growing areas will be mostly dry through the start of August, according Somar Meteorologia, a Sao Paulo-based weather forecaster. Prices rebounded from a 21-month low last month and entered a bull market on July 9 after rain in May and June delayed Brazil’s harvesting and exports. Sugar is now poised for its worst weekly performance since March as the drier weather eased concern about the crop and refocused attention on the prospects for a glut.
Czarnikow Group Ltd., which traded the commodity in 90 countries last year, is forecasting a second consecutive surplus in the season that starts Oct. 1. “The harvest in Brazil is catching up and that is a good bearish signal for the market,” said Jonathan Bouchet, a trader at Boman Capital SA, a Geneva-based hedge fund. “The weather in South America at the moment is adequate to harvest and ship, which will increase supplies and keep pressure on prices.”
Oil Rises for Third Day on U.S. Economy, Euro Pledge (Source:Bloomberg)
Oil rose for a third day as U.S. reports on durable goods and jobless claims reduced concern that economic growth is slowing, and the head of the European Central Bank pledged that the euro will survive. Prices gained 0.5 percent as bookings for goods meant to last at least three years climbed more than projected in June and fewer Americans than forecast filed first-time claims for unemployment insurance payments last week. ECB President Mario Draghi said policy makers will do whatever is needed to preserve the European common currency. “The bullish economic news is the main thing pushing oil prices up, and it does look a little more like we are seeing a turnaround in the economy,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Draghi said they are going to defend the euro and it gave the market more confidence.”
Crude for September delivery rose 42 cents to settle at $89.39 a barrel on the New York Mercantile Exchange. Prices have increased 15 percent from the year’s closing low of $77.69 a barrel on June 28. Brent oil for September settlement climbed 88 cents, or 0.8 percent, to end the session at $105.26 a barrel on the London- based ICE Futures Europe exchange. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said in a speech at the Global Investment Conference in London today. “Believe me, it will be enough.”
OIL-Brent falls below $104, gloomy demand outlook weighs
LONDON, July 26 (Reuters) - Oil prices dropped below $104 a barrel as a stronger dollar weighed and disappointing corporate earnings contributed to a gloomy outlook for demand growth.
"We have to keep in mind that next Wednesday there is a U.S. Fed FOMC meeting which will create some short-term flat price volatility," wrote Olivier Jakob of Petromatrix in a note on Thursday.
Libya sees return to pre-war oil output in Oct
TRIPOLI, July 26 (Reuters) - Libya expects to be back to pre-war oil production in October, later than previously forecast due to interruptions and the slow return of oil services firms to the North African country, Deputy Oil Minister Omar Shakmak told Reuters.
Output has climbed back close to pre-war levels of 1.6 million barrels per day (bpd) since a virtual standstill during last year's uprising that ousted Muammar Gaddafi but protests and interruptions have dealt the sector several setbacks.
NORWAY GAS-Flows to Europe rise on higher exports to Germany
OSLO, July 26 (Reuters) - Norwegian gas flows to Europe rose by 8.3 percent on Thursday morning from the previous day average on increased exports to Germany.
Supplies to Europe rose to 283.8 million cubic metres (mcm) at 0700 GMT on Thursday from Wednesday's average of 262.1 mcm, data from Norway's gas system operator Gassco showed.
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