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Massive drought in U.S. Midwest sends global crop prices soaring

July 10, 2012, USA - The increased pricing in corn is a direct response to a drought in the U.S. Midwest, with the hot and dry conditions limiting yields, thereby lowering supplies and boosting prices.

A massive drought in the U.S. corn belt, the worst some say in nearly a quarter-century, has triggered a buying frenzy in global grain markets and bolstered Canadian fertilizer producers.

Prices for key agricultural commodities such as corn, soybean and wheat have soared in the past few weeks as investors realize yields in the corn belt are going to be far lower than they expected in the spring.

Grain prices are approaching the peak levels reached in mid-2008, a period when many other commodities were also hitting record highs just before the economic meltdown. While many commodities are well below those levels today, grains have climbed all the way back.

Corn prices lead the sector’s rally, having jumped about 35% in the last month and the key futures contract has reached US$7.86 a bushel. Soybean prices Wednesday hit an all-time high of US$16.79 a bushel.

The increased pricing is a direct response to a drought in the U.S. Midwest, with the hot and dry conditions limiting yields, thereby lowering supplies and boosting prices. The U.S. is the world’s biggest corn exporter and the one that is most watched by traders, so weather patterns in that country can have an outsized effect on world prices.

“This recent price escalation is unlike anything we have seen in recent years,” National Bank Financial analyst Robert Winslow wrote in a note.

A few months ago, when the weather was good, all the talk in grain markets was about the early planting season in the U.S. At the time, it appeared yields were going to be better than normal, leading many customers to hold off their purchases and drawdown inventories in anticipation of lower prices.

Grain buyers are now facing potential shortages because many farmers are struggling to grow anything. Some farmers have even plowed under their current corn crop and replanted in hopes of better harvesting conditions in the fall.

“With these prices, if you get a good crop you can make a lot of money,” said Bruce Waterman, vice president of international development at Agrium Inc.

All eyes in the sector are now on the U.S. Department of Agriculture, which will release an update on U.S. corn yields on Wednesday. The report should reveal the extent of the damage caused by the dry weather. The current USDA forecast is for a yield of 166 bushels per acre, but that is expected to fall closer to 150 bushels.

The surge in grain prices has had a predictably strong impact on the prices of Canadian fertilizer equities such as those of Agrium and Potash Corp. of Saskatchewan Inc., which are up 13% and 16%, respectively, in the past month. Higher crop prices should lead to higher fertilizer prices, because farmers can afford to pay more for their inputs.

Mr. Winslow wrote there is still more room for grain prices to rise, but that dynamic could change quickly. Demand destruction and a big uptick in South American production are two factors that could hit the market. He also noted that soybean yields are currently not as threatened as corn yields, because soybeans pollinate later in the season and could benefit from some long-overdue rainfall.

July 10, 2012  By Peter Koven - Financial Post


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