There is no doubt the grain complex has evolved into a full-blown weather market thanks to above-normal temperatures and below-normal rainfall in the U.S. Grain Belt going into the heart of the growing season.
The last half of May and first half of June has been the driest and hottest in U.S. history and grain prices have rallied sharply as a result. And now the dryness and heat will swamp the corn crop just as pollination begins in earnest.
The rule of thumb for the corn and soybean crops is simple and to the point. A corn crop is made or broken in July; a soybean crop in August.
It is already being estimated that 64% of the nation’s corn crop and 57% of soybean crop are considered to be in a drought.
And that is why corn prices in less than a month rallied $1.38 a bushel while new crop soybeans jumped $2.48 a bushel. Chicago wheat prices rallied as much as $1.62 a bushel.
Few times in history have the grain markets been so bullish going into the time period when the crops can be made or broken and did so in less than a month.
The bullish case for the grain markets is due to a lack of supply, not a loss of demand. Hot and dry weather can slice yields and production, setting the stage for higher prices for another year.
Note, however, drought-like conditions are also showing up in Australia, Europe, Ukraine and Southeast Asia. Hot and dry weather is plaguing a number of nations across the globe and threatening to push ending supplies of grain to even lower levels.
From “NASA says 2022 fifth warmest year on record, warming trend continues” at www.nasa.gov earlier this year: “’This warming trend is alarming,’ said NASA Administrator Bill Nelson. ‘Our warming climate is already making a mark: Forest fires are intensifying; hurricanes are getting stronger; droughts are wreaking havoc and sea levels are rising.’
“The past nine years have been the warmest years since modern recordkeeping began in 1880. This means Earth in 2022 was about 2 degrees warmer than the late 19th century average.”
From tradingeconomics.com in May: “Food inflation in the United States fell to a near one and a half year low of 6.7% year-on-year in May 2023, from 7.7% in the prior month and a peak of 11.4% in August 2022. Prices eased further for both food at home (5.8% versus 7.1% in April) and food away from home (8.3% versus 8.6%).”
However, the current rate of all inflation in the United States is pegged at 4.05%, compared to 4.93% last month and 8.58% last year and is higher than the long-term average of 3.28%. Food inflation remains elevated and higher than inflation seen elsewhere in the economy.
From a sobering headline, “How climate change is raising the cost of food,” by CBS MoneyWatch: “The upshot: Climate change has already pushed up food prices and inflation over all, the researchers found. Looking ahead, meanwhile, continued global warming is projected to increase food prices between 0.6 and 3.2 percentage points by 2060, according to the report.”
The same article goes on to state: “Global warming affects crops in several ways. Yields of corn, a staple crop in many warm countries, fall dramatically after the temperature reaches about 86 degrees Fahrenheit. A 2021 study by NASA researchers found that global corn yields could drop by 24% by the end of the century. Rice and soybeans — used mostly for animal feed — would also drop, but less precipitously, according to a recent report from the Environmental Defense Fund said.”
The final sentence from the article was: “The heat extremes of the 2022 summer in Europe is a prominent example in which combined heat and drought had widespread impacts on agricultural and economic activity.”
But, as I stated, this year from mid-May to mid-June has been the driest and warmest in the history of the United States. And the heart of the growing season is just now arriving and the weather remains threatening.
The hot and dry growing conditions this week that sparked sharply higher prices for the grain markets was the big story this week. But late in the week, Federal Reserve Chair Jerome Powell said U.S. interest rates will be raised a few more times this year.
And interest rates in England were unexpectedly raised 0.5%. Turkey shocked the world with a rate hike going from 8.5% to 15%.
The rate hikes were clearly bearish and intended to fight food inflation and other inflation, as well.
But the weather pattern for the Grain Belt remains more than worrisome and bullish — in particular, regarding food inflation.
And though I would not fight the Fed, always remember that Mother Nature and the weather trumps higher rates.