ARTICLE IS FROM THE WALL STREET JOURNAL - WRITTEN BY ANDREW JOHNSON, JR
CHICAGO—Corn prices soared toward new highs on Monday amid growing fears that the drought scorching the U.S. Midwest will prove to be the harshest in decades.
Corn futures for July delivery jumped 4% to $7.7525 a bushel on the Chicago Board of Trade, extending gains to 29% in the past three weeks, as intense heat and a dearth of rainfall punish parts of big corn-growing states like Illinois, Indiana, Iowa and Ohio. Corn prices are just cents away from the nominal record $7.9975 a bushel reached in June 2011, when prices were rising because of worries about flood damage.
The hot, dry weather could cut the U.S. harvest this autumn by more than 1 billion bushels below the federal government’s forecast of two months ago, leaving domestic supplies relatively tight, analysts say.
A higher cost of corn likely would drive up the cost of feed for livestock producers, which could lead in turn to higher meat prices, and also spill into the prices consumers pay for cereal, sodas and other packaged foods. Rising corn prices already are squeezing profits for U.S. ethanol companies.
To be sure, corn futures could cool down if weather forecasts change or demand for corn from ethanol or livestock producers falls in response to high prices. Temperatures have declined in the Midwest in recent days, but weather outlooks project relatively little rainfall in the corn belt over the next two weeks.
At this rate, farmers and analysts worry the current drought may turn out to be the worst to hit the corn belt since 1988, when a drought cut output by 31% from the previous year and hastened the consolidation of American farms.
Farmers in much of the Midwest have suffered from a lack of rain for more than a month, and the heat and dryness has become more acute. Temperatures averaged from 10 to 15 degrees above normal in the Midwest last week, hitting triple-digit readings for 10 days in a row in St. Louis, Mo.
As of last week, about 60% of U.S. corn acreage was experiencing moderate to extreme drought, up from 49% a week earlier, according to the U.S. Department of Agriculture. Moderate drought indicates dryness levels that occur once every five to 10 years, while extreme drought occurs every 20 to 50 years.
Most of Illinois, Indiana, Missouri and Ohio—which together account for 30% of U.S. corn production—is experiencing drought, and some key corn-growing areas of those states have faced triple-digit temperatures for several days. More than two-thirds of Iowa, which is the biggest corn-producing state with 19% of production, faces abnormally dry or moderate drought conditions.
The drought is hitting corn fields during the critical pollination stage, when moisture has its greatest impact on potential yields.
Pollination determines the number of kernels each ear of corn produces, making damage in this phase irreversible.
“I’ve been farming since 1992, and I can’t remember a year that it’s been this dry this early,” said Kevin Cates, who planted 1,300 acres of corn this spring at his farm in Kingman, Ind., where temperatures were above 100 degrees for three consecutive days last week. “Our corn crop is just holding on.”
Mr. Cates said his corn is about four feet high, but should be about seven to eight feet. Mr. Cates said plant leaves are curling and turning yellow—and dying in some places.
Some northern areas of the corn belt, including Minnesota, the Dakotas and western Iowa, have received adequate rainfall and crops are in relatively healthy shape, according to the USDA. Minnesota, North Dakota and South Dakota account for about 17% of the U.S. crop.
Alan Palmer, an independent futures trader in Chicago, said he expects the drought to continue to push up corn prices. He recently profited from taking positions in the options market, betting futures would rise, but has no positions now, citing volatility.
“This drought feels like the real deal,” he said, but added that markets can shift rapidly when weather forecasts change.
Corn for December delivery—the contract most closely linked to expectations for this fall’s harvest—rose 5% to $7.30 a bushel on Monday. Soybean and wheat prices also have jumped. Soybean futures settled at a record $16.65 a bushel Monday.
Some analysts say corn’s rise could still peter out, because demand from livestock producers and other big corn buyers will cool. Some ethanol producers are idling plants because they face losses at current prices for corn and falling demand for gasoline, analysts note. Ethanol consumes nearly 40% of U.S. corn output.
The USDA said Monday that 40% of this year’s crop is in “good” to “excellent” condition, down 16 percentage points from two weeks ago and the lowest rating for this time of year since 1988.
In May, the USDA projected a record corn harvest of 14.79 billion bushels, surpassing the previous mark of 13.09 billion in 2009. U.S. farmers, spurred by high prices in recent years, planted 96.4 million acres of corn this spring, the most since 1937.
Expectations for a huge crop in the U.S.—the world’s biggest corn producer and exporter—had kept a lid on prices until early June.
Larry Lylund, a farmer in central Iowa, said his corn crop is the driest he has seen since he began farming in 1967.
For the first time in 15 years, Mr. Lylund said, he decided not to sign a forward contract to sell corn to a grain elevator. He said he was betting that prices would rise, but also worried that “I may not have the crop production” to fulfill the contract.
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