Drought Takes Toll on Corn By Chris Orr, Editor of Weather Trader Dear Sovereign Investor, For many people, Memorial Day marks the start of summer — regardless of what the calendar says. After a brutal winter, it's a day of relaxing with family in the warm sun, hamburgers sizzling on the grill and an ear of golden corn slathered in butter.
But did you know very little of the commodity actually makes it to the dinner table?
Corn is amazingly versatile. Food and beverages contain high-fructose corn syrup. Ethanol appears in gasoline. Everything from chewing gum to textiles uses corn. Livestock are fed a majority of the corn harvested, but it also appears in plastics, pharmaceuticals and explosives.
As an agricultural commodity, corn is naturally susceptible to the weather — and in some parts of the world the weather will work against the crop. Advertisement
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Click here to find out more. Despite some early setbacks, this year's corn crop is progressing along nicely, well ahead of last year's pace. However, it is still early in the season and there's ample opportunity for the weather to shift for the worse before the corn harvest.
It took a month, but the cold, wet ground across the Corn Belt has warmed and dried, allowing farmers to plant. The only states that are struggling with their corn crops are North Dakota, Wisconsin and Michigan, where half the normal acres of corn have been planted so far. Those states will catch up, but it'll be a long, hard row to hoe.
Even though the number of acres of corn planted this year is expected to be 4% less than it was last year, the plants are beginning to emerge from the ground and the USDA anticipates a record crop as the bushel-per-acre yield increases.
Corn futures have fallen since the USDA came out with that prediction on May 9. Furthermore, the record crop expected by the USDA will push the price down another 60 cents per bushel to $4.40.
However, the USDA's prediction assumes that there will be ideal weather conditions across the Corn Belt this year. But, bad weather, such as hailstorms or flooding, will ruin acres of corn and produce a smaller harvest. That, in turn, will lead to higher corn prices.
Hailstorms have missed the Corn Belt thus far, but there's still plenty of time for that to change. The position of the jet stream and an influx of humid air from the Gulf of Mexico create a significant risk for hailstorms all across Midwest and Great Plains this summer. While the bushels of corn per acre will most likely offset minor hail damage, catastrophic damage created by hail could send the price of corn shooting higher as production levels drop.
The only other headwind for corn in the United States is a root worm that is resistant to pesticides. The root worm is spreading across Ohio, Indiana and Illinois. We'll have to wait and see how much damage it does this year. El Niño and Corn El Niño has already started impacting weather patterns around the globe, disrupting crop production so that prices have been steadily increasing. Wheat production is struggling in Australia and India. Beef prices are also on the rise due to drought. And now El Niño will affect two corn growing regions of the world: Brazil and China.
Brazil just can't catch a break this year. Drought has developed across Brazil during this past growing season in response to the developing El Niño, which has already put a significant dent in Brazil's coffee bean production. The dry weather will be replaced by too much rain during the upcoming growing season, which will also produce lower-than-normal corn yields.
Just to the south, Argentina's crop is expected to be good and that will help offset Brazil's shortfall.
East-central China's Corn Belt will likely be hit by drought this year, putting half of their crop at risk of failure. China has already increased corn imports to the tune of 252% in the past year. Most of the corn is used as feed for livestock, as the nation's growing wealth results in higher demand for meat. Even if China's corn crop fails, they can easily increase their imports to meet demand. Most of the corn China imports comes from the U.S., which helps to support the price of the commodity here at home. Taking Advantage of the Corn Market Corn production during the upcoming growing season will be about the same as last year. Drought will restrict the ability of China and Brazil to grow enough corn, while the political situation in Ukraine will impact exports from that region.
The tipping point in the price of corn will be the USDA's Grain Stocks report, which includes information on the world corn trade, that is due out June 30. Until then, the price will generally drift lower. The wise position to take is to wait on the sidelines until the June 30 report comes out and be ready to make trades based on it. There's a silver lining in every cloud,
Chris Orr
Editor, Weather Trader P.S. El Niño will continue to wreak havoc around the globe until late 2015, creating unique investing opportunities for anyone who wants to be ahead of the trading curve. If you'd like to learn more about how you can profit from changes in the weather, I will be one of the many presenters at the Total Wealth Symposium this September. To see the entire line up of presenters and reserve your seat before we're sold out, click here. | |
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