When Will The Grain Market Get Nervous About The Fact That The Drought In The S. Plains Is Moving Into The Western Corn Belt?

A peak at the drought monitor shows a startling development; the severe drought in the S. Great Plains is moving into the western Corn Belt. Extreme dry conditions are evident in key growing areas of the Corn Belt stretching from Northern Missouri to S. Minnesota. The dry pocket includes nearly all of Iowa, a portion of central Illinois, the eastern fringes of Nebraska and S. Dakota and a major portion of southern Minnesota. Without good rains this winter, producers will be planting corn in soil largely depleted of subsoil moisture. While it’s still possible to raise good corn in this environment, the lack of subsoil moisture makes good yields a much more risky venture.

The national average corn yield has come in below trend line for two consecutive years. This has not happened going back as far as 1989. Producers have expanded acreage devoted to corn production during the last two years. However, due to disappointing yield, each of the last two years we’ve raised less corn than we’ve used. The result has been a depletion of corn stocks to extremely low levels. Many in the grain trade are choosing to ignore this because of the fact that corn prices broke over $2.00 during September. In fact, many in the grain trade are now bearish toward corn prices moving forward. The two primary factors cited for being bearish are the sovereign debt situation in Europe and adequate world corn ending stocks.

The debt situation in Europe, while far from being solved, is in the process of being moved "to the back burner" by the trade. This story, moving forward, likely will not dominate the grain trade. The perception of adequate world corn ending stocks is, frankly, inaccurate. World corn stocks have never been tighter. World corn ending stocks have declined for three consecutive years. In addition, because total corn use continues to rise, world corn stocks-to-use, just below 15%, has not been this low going back to 1981. On the world level, corn usage has surpassed world production for the last three years. Beginning in 2007, total corn usage began to accelerate and continues to reach new record highs each year. Thus, the perception that world corn ending stocks are adequate is simply incorrect.

One major change in the corn market that is leading to the perception that world corn stocks are adequate is the fact that the U.S. is losing market share in the world corn export arena. This is a direct response to record high corn prices, which has encouraged other countries to expand production. This is quite necessary because the U.S. is having real trouble expanding production fast enough to meet the accelerating world demand for corn. Thus, when we see our traditional corn import customers purchasing large amounts from S. America, S. Africa, Russia and the Ukraine, the perception develops that world corn stocks are fully adequate. Again, the data indicates just the opposite.

Given the potential major problem in regards to drought in the western corn belt, I must ask what happens if the U.S. economy gains traction in the months ahead? What happens if the U.S. dollar continues to edge downward and what happens if the Chinese continue to come to the U.S. for large amounts of corn? Any one of these or any combination of the three fundamental developments has the potential to drive corn prices back upward toward their record highs.

Look for the December corn contract to find increasing levels of support as it trades down toward $6.30. A close above $6.65, if and when it occurs, will target prices to a test of the highs. My current upside target in the December corn contract is $7.70.