Written by Krista Swanson
Wide
spread drought conditions currently blanket the Midwest for the first time since 2012, including some of the top grain producing states in the nation. Some areas have received rains that represent a divergence from 2012, but persistent drought conditions remain. While drought is the supply side sizzler of this summer, recent changes to estimated planted acres also offer the market interesting dynamics on the supply side of the grain balance sheets.
Drought Relief Ahead?
As estimated 49% of the continental U.S. is at least abnormally dry with 27% in drought as of July 11, 2023. Although overall drought conditions are slowly improving, the positioning has shifted and now encompasses Missouri and most of the production areas of the nation’s four largest corn and soybean producers. An estimated 64% of corn areas and 57% of soybean areas are in drought.
In Missouri, 99.8% of the land is at least abnormally dry. Over half the state is in severe drought and a quarter in extreme drought. The last time Missouri registered drought conditions this high in the June and July phase of the growing seasons was 2012.
The National Weather Service seasonal drought outlook shows drought conditions improving across all of Missouri between now and September, and drought removal likely in some parts of the state, a welcome divergence from 2012. While we wait to see how the weather materializes over the next month, here’s the latest on productivity and price expectations.
Crop Productivity
In the July World Agricultural Supply and Demand Estimates (WASDE) report, USDA reduced their corn yield projection from the initial 181.5 bushel per acre down to 177.5 bushels per acre. Despite the reduction, the new forecast would still be a record yield. USDA noted lower than average June precipitation, but timely rainfalls and cooler than normal temperatures in parts of the corn belt in early July. The 4 bushel per acre drop in corn yield likely had some weather influence. But the 2.1 million increases in estimated planted acres, expanding corn outside the highest producing areas, could have also been considered. The increase in acres more than offset the decline in yield, resulting in a 55-million-bushel increase in corn production.
On the soybean side of the equation, USDA dropped estimated soybean acres by 4 million. While drought can impact soybeans, drought effects on soybeans are generally not as severe as corn. It’s not surprising that USDA did not make any weather-related adjustments to yield on the soybean side. Regardless, soybean production was cut by 4.3 billion bushels with the downward adjustment in acres which prompted downward moves in domestic use and exports to keep the supply and demand sides in balance.
In the coming weeks there will be more clarity on drought related yield impact that will be variable given the influence of genetics, in addition to growing environment and agronomic management. The weather throughout the second half of July and August is seemingly more critical to yield than June or early July weather.
Price Action
In the past month alone, the closing prices of the December corn futures contract have fluctuated in a volatile $1.45 range. Weather concerns in the second half of June drove the market up to $6.2875. The combination of precipitation in dry areas and an unexpected 2.1 million increase in corn acreage drove the market down $1 in eight days. Price continued to drop reaching a $4.3875 low in mid-July before inching back upward. Looking ahead, yield may be reduced further in August or September, if warranted. Some corn is to the point where ear counts can be taken, the next hurdle for yield potential is pollination. Of the 94.1 million expected corn acres, an estimated 2.5 million were unplanted at the time of survey in the first two weeks of June. That leaves the door open for a downward revision to final planted acres. Either of these adjustments in the coming months could be a positive for corn prices.
A major price movement has also been charted on the soybean side over the past month, with the November soybean futures contract bouncing in a $1.12 range. Price fell from $13.77, bottoming at $12.65 before rebounding to $13.73. Some factors in the declining soybean price were biofuels policy/targets, and global competition. Then the USDA’s major drop in soybean acres and production jolted the market boosting price by over $0.77 in a single day. Even with a national trend yield, soybeans are facing a tight balance sheet that is likely to keep price elevated, assuming upward revision in final planted soybean acres that would indicate more soybeans out there than the market is currently anticipating.
Final Thoughts
Despite widespread areas of corn and soybeans suffering drought conditions, USDA expects yield to be near or on-trend at this point. The next four weeks will be a critical period for the productivity of both crops. Fortunately, it looks like some relief is ahead. The balance sheets for corn and soybeans have taken very different turns from initial expectations this month. July may be the traditional month for fireworks, but we could see some sparks fly in August and September as we move closer to final numbers.
Krista Swanson is a consultant and speaker for her business AgSCOPE, and a research analyst for the Department of Agriculture & Consumer Economics at the University of Illinois where her work is frequently published in articles on farmdoc. Krista and her husband actively farm with his family where they raise corn, soybeans, and four kids on the farm.
Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the views, opinions or positions of FCS Financial.
