Worldwide droughts severely affecting grain crops

Wednesday, August 8, 2012
By Paul Martin

When the U.S. Department of Agriculture releases its most recent corn crop estimate in its World Agricultural Supply and Demand Estimates (WASDE) report, the results are not expected to be pleasing for those who must buy grain crops.

Judging by market action over the past week, the report looks to be dismal as the exchange traded funds for corn ( CORN , quote ) and soybeans ( SOYB , quote ) have both increased due to the impact of droughts.

In the previous WASDE report, the percentage of the U.S. corn crop rated excellent or good was 40%. However, due to record-breaking droughts in the Midwest farm belt, corn and soybean grain crops have continued to deteriorate . Due to the lack of rainfall, only 24% of the corn crop is rated in good to excellent condition, and 48% is rated poor to very poor. As the U.S. produces about 40% of the world’s corn crop, this shortfall has had a devastating impact on the agricultural sector.

Over the last month of market action, CORN is up by 9.4%. Over the same period, SOYB has risen by 2.46%. As the chart below shows, the increase in price of both SOYB and CORN began in June as the impact of the droughts increased. There have corrections along the way, as most of the buying has been done by speculators . The soaring volume in these grain crops is testament to that.

Adding to the surge in CORN was the largest purchase of American corn by Mexico in over two decades. Even though both CORN and SOYB are trading near 52-week highs, the Mexican government expects the price to continue rising as a result of the droughts further damaging grain crops.

The purchase could be a sign that a peak is near. The most recent jump is likely the result of speculators anticipating a bearish report from the U.S.D.A.

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