Crop Condition Ratings Show Some Sobering Numbers

July 17, 2012 12:54 AM

What Traders are Talking About:

* Predictably corn and soybean crop ratings fall, although more than anticipated. The prolonged heat and dryness took another major bite out of the corn and soybean crops last week, as anticipated. As of Sunday, USDA rated the corn crop 31% "good" to "excellent" (down 9 percentage points from last week) and 38% "poor" to "very poor" (up 8 points). When USDA's weekly crop ratings are plugged into the state-weighted Pro Farmer Crop Condition Index (0 = crop failure; 500 = perfect crop), the corn crop plummeted 23 points to 280 while the soybean crop plunged 11 points to 292. All Corn Belt states showed declines again this week. In looking at the individual state figures, there are some sobering numbers. For corn, the portion of crop rated "poor" to "very poor" stands at 56% in Illinois, 71% in Indiana, 51% in Kansas, 77% in Kentucky, 56% in Michigan, 72% in Missouri, 47% in Ohio and 43% in Wisconsin. Even in the better states, 27% of the corn crop is rated in the bottom two categories in Iowa, Nebraska and South Dakota, while Minnesota and North Dakota have only 9% rated "poor" to "very poor." The numbers aren't as alarming for soybeans, but they are concerning.

The long and short of it: With more heat and dryness in the forecast, there's nothing indicating crop condition ratings will stabilize anytime soon, although a market top is likely before yield-loss is fully realized.

* Forget 1988, this drought is worse. National Oceanic and Atmospheric Administration said in a report on Monday that, based on the Palmer Drought Index, 55% of the contiguous U.S. was under moderate to extreme drought in June, making this the worst drought since 1956. With conditions worsening this month, this year's drought will continue to climb the historic drought scale. The concern now is that drought is spreading into the northwestern Corn Belt, an area that has been considered relatively "good."

The long and short of it: Many are starting to compare this year to the drought of 1934, when over three-quarters of the country was engulfed in drought.

* Price action very unpredictable. Trading commodities is somewhat of a gamble to begin with, but given current extreme circumstances, many traders are signaling it's basically a crapshoot. Trying to peg when and at what price markets will top in situations like this is extremely unpredictable. While there is strong fundamental reason for prices to keep charging higher, weather-induced rallies are typically short-lived and end before they seemingly should.

The long and short of it: Because of the extreme unpredictability, it's imperative that you not get more bullish as prices rise and that you have downside protection in place as the eventual price fall could be more extreme than the rocket shot higher.


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