Process Of Rationing Supplies Begins

July 31, 2012 01:41 AM

What Traders are Talking About:

* Searching for a price that slows use. While the full extent of crop losses due to severe drought are not fully known yet, the some of the focus is shifting. Weather premium has been built into the market. Traders are now starting to focus on the demand side as they look for prices that will slow use and ration supplies. For corn, there are indications the process of slowing use is underway as ethanol production continues to decline and export demand has slowed while corn import talk has increased. But for soybeans, there has been no solid proof of demand deterioration. In fact, China has continued to buy U.S. soybeans. And the crush pace has stayed solid amid strong demand for meal to replace declining DDG supplies as ethanol production slows. That suggests soybean prices must go higher yet.

The long and short of it: If widespread, "saving" rains aren't seen for the soybean crop in the next two weeks, the urgency to more aggressively find a price that rations use will build.

* Crop conditions continue to decline. USDA's weekly crop condition ratings showed only 24% of the corn crop and only 29% of the soybean crop is rated "good" to "excellent" -- both down 2 points from last week. Conversely, 48% of the corn crop and 37% of the soybean crop is now rated "poor" to "very poor" -- up 3 points and 2 points, respectively. 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 dropped another 8 points to 255, while the soybean crop declined another 6 points to 274. For both corn and soybeans, slight improvement in CCI ratings for Ohio and Indiana were more than offset by declines in the other key production states.

The long and short of it: For soybeans, rains last week helped improve conditions in Indiana and Ohio. For corn, the modest improvement in Indiana corn crop conditions probably had more to do with some of the worst acres being chopped (or mowed off) rather than being helped by rains.

* Palmer Drought Index shows severity of drought. The long-term Palmer Drought Index shows much of the Corn Belt needs 9 to 15 inches of rain to get back to normal and some areas of Illinois and Indiana need in excess of 15 inches of rain to erase the drought. While the Australian Bureau of Meteorology says El Nino continues to build, suggesting relief from the drought conditions is on the way, moisture deficits are so severe the Corn Belt will remain in drought through the remainder of the growing season. A replenishment of moisture supplies will have to come over a period of time.

The long and short of it: The Palmer Drought Index clearly shows why there are significant crop problems through the bulk of the Corn Belt. Even with modern seed technology, crops still need moisture to build yields.


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