Is the drought busted?

By Ray Grabanski

The U.S. crops have been devastated this summer by drought, with very dry/hot weather in June and July.

The inclement weather tanked corn yields by 25% below 'trend', and dropped current USDA soybean estimates to 36 bu/acre, well below trend of 43.5 bu.  So, the terrible US weather in June and July, with record heat and about 50% of normal precip across much of the Corn Belt devastated yield potential of the US crop.  

However, since August temps have been cooler than normal, not just by a little bit, but 4-12 degrees below normal.  There is no question that the heat part of the 2012 summer drought has ended, as the forecast the next two weeks is for well below normal temps.  If that is true, August will go down as cooler than normal.  So far, though, the rainfall that usually accompanies cool weather has not occurred.  Sure, we have had more rain in August than in June or July, but it hasn't necessarily been wet, either.  Some states have had great weather, with rains making soybean fields resuscitated and yield potential restored in many cases (like the northern Corn Belt states of MN, SD, and ND).  

However, the question remains of whether or not soybean yields are actually improving.  So far, in Pro Ag yield models, corn has increased a few bushels the past few weeks (which is surprising because most believe corn cannot be helped), but soybean yield models are still indicating yields below 38 bu/acre (about 37.7 bu/acre).  USDA yield projections are even lower as of August 1, at slightly more than 36 bu/acre.  But has it improved in August?

The question is important, as if soybean yields can improve from August forward, then that frees up SAM acreage to be planted to corn.  If US yields can be revived to 38 bu, or even 40 bu/acre in soybeans due to ideal weather in August, it could have a tremendous impact on the supply/demand fundamentals of the market.  And of course, the same impact on prices.

While many were talking about $10 corn and $20 soybeans in late July/early August, the change in US weather since August 1 might be making those projections a moot point.  Cooler than normal weather accompanied by intermittent showers could have a tremendous impact on yield potential.  

So, while the whole world is finally talking about the terrible drought of 2012, and it's finally making front page news in major media outlets, sometimes that is the final straw in the bull market.  The old saying is once the grain markets become in the front pages of major media outlets, the market has probably topped!

Are we there yet?  Given the change in summer weather starting August 1, with much cooler than normal temps and intermittent showers, we could very well have ended the devastating drought of 2012 about August 1.  

That means that the USDA yield projections August 10 might be the lowest of the year (especially for soybeans, which have time to put more yield onto projections).  If that is the case, we could very well have topped the market.  

The stakes are huge.  If we've topped the market, we should be sellers now at $8 corn and $16.50 soybeans, not buyers.  And multiple year sales might be in order, as there is no question that demand destruction must take place in 2012.  And that impact might be felt for years!

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