Spring's Favor Turns to Summer's Distress

Andy Waldock  |

Spring’s early warmth is quickly turning into summer’s furnace. The same weather that allowed farmers to get their planting done at a record pace is now threatening the welfare of those same crops. The dry weather is also fueling a rebound on the heels of May’s declines. The declines of 14.5% in July corn and 12% in July soybeans helped trim the record speculative positions in both of the markets by 25%. The markets have reset and are now being driven by the weather and crop reports.

Grain traders, farmers and end line users have access to more data than perhaps, any other market. Ag Trader Talk reported that soil moisture for the Midwest grain belt is the second driest since 1895. Precipitation models are available for every major production region in the world. You can access Chinese, Australian, Russian and South American weather reports as quickly as you can Google. The dry soils will have a material impact on the double crop beans in the Eastern Corn Belt, which will have tough time getting planted at all. This solidifies the bean strength over corn weakness thesis we’ve been operating under since the first planting reports.

The USDA publishes many regular reports. The weekly Crop Progress Report tracks the main producing states’ crop condition rated as poor, fair, good or excellent. The recent drop in soybean crop condition, to the lowest levels for this time of year since 1993 fueled a single day rally of 3.5%. There is also some correlation between the mid-June Crop Progress Report decline in soybean conditions and the final yield for the soybean market. The soybean market needs to hit trend line yields near 44 bushels per acre. Anything below this would seriously compromise the stocks to usage ratio, which continues to flirt with record lows due to strong overseas demand. In fact, global demand has outpaced supply in three of the last five years.

China’s impact on the grain markets cannot be underestimated. The growth of their livestock industry to meet the growing appetites of their economically empowered middle class can be seen in the dramatic increase in their grain usage. For example, China used more corn for animal feed in 2011 than they used as an entire country in 2004 and their soybean usage has more than doubled during the same time period.

Fortunately, the USDA tends to underestimate the corn crop in the June Crop Report. Recently, the margin of error has pushed towards 300 million extra bushels by harvest. Commodity bulls may be jumping the gun on the early summer’s effect on end yield, as well. The Commodity Weather Group’s studies show that the Mid-June Crop Progress Report is an unreliable yield predictor for the corn market. This is just as important because the corn market also started the year with little in reserve as last year’s usage far outpaced corn’s below trend yield. This is part of what led to the record corn acreage being planted this year.

Modern farming practices continue to push the efficiency envelope. I think this is one of the main reasons why there is little predictive value in comparing current conditions to those more than 100 years ago or, even 20 years ago. News reports may sensationalize the use of genetically modified seeds and the impact of fertilizer on the ground water supply but the fact is, without the continued advancement of the agricultural sciences the world would rapidly experience an exponential explosion in food costs.

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