Porto Alegre, August 2, 2022 – The strong change in the price environment on the CBOT in the last week of July presented the climate as the only responsible. The week before, the weather had forecast an early August with rain and mild temperatures. At the beginning of last week, weather forecasters projected a completely inverse climate, with extreme heat and below-normal rainfall. This is the only principle for the week’s highs, the fundamental one, as corn crops are in the pod-filling phase and soybeans are in early blossoming. The worst that could happen for these two crops is this combination of excess heat and lack of rain.
The well-known and traditional “weather market” is still present in 2022 and its influence must only stop from September, when the production profile of the crops will be defined. August is always a delicate month for the US crop and, therefore, high or low volatility is always present, and we can say that this is “normal” for this US climatic moment with impacts on Chicago prices.
The weather, therefore, is once again present and making markets more volatile at this moment of decision for the US crop. Corn crops are in the final stage of silking and beginning of pod-filling, except for locations where planting is always earlier, such as in the west of the Midwest, some crops are already maturing.
Why did prices change direction last week? The weather forecast had been projecting, the week before, a situation of regular rain and mild temperatures for most of the Midwest. Last Monday, the maps registered a radical change by projecting above-normal temperatures, perhaps setting records, and below-normal rainfall. An awful combination for US crops in their decisive stage of production.
In the last seven days, the rain hit the Delta and the southwest of the Midwest, mitigating the impact of drought and high temperatures for this region. However, the rain practically did not fall in other locations. So, the heat and the limited rain generated this important attention to crops at the end of July.
At the same time, USDA surprised by worsening the share of good to excellent crops last week from 64 to 61%, which helped to consolidate market concerns about yield potential. If there are no great chances of changes to the planted area, the luck of US production this year is centered on productivity. As the weather at the end of July did not change substantially to correct this trajectory of crop conditions, USDA is expected to start August showing the same conditions as last week or, perhaps, even with some worsening. The point is that the rain is needed right now, in September it will be too late for any correction in the US production and, at this point, the market is already starting to project productivity cuts.
On the 12th, USDA will make its first field update for the corn productivity projection. Projected today at 177 bushels/acre, the same record-breaking level as in 2021, productivity may not be able to repeat the good result of 2021. It is important to assess that in 2021 there was a strong drought between Iowa and the Plains, generating the expectation that productivity could reach very low levels, between 155/160 bushels per acre. In the end, the 2021 crop yield set a record of 177 bushels/acre. The detail is that Iowa, the top producer, was in the midst of a severe drought in the region last year.
As we see when comparing the two late July soil moisture maps between 2021 and 2022, soil moisture conditions are different this year. The central Midwest region, including Iowa and Illinois, the two main producers, are in near-normal conditions. The problem for 2022 is the Delta and the southwest, i.e. Missouri, Kansas and Nebraska. These states are well supplied with irrigation pivots and can still show results that are not extreme losses, despite the existence of very bad crops and already with irreversible losses.
The weather in August will be critical for this determination due to pod-filling. Besides the USDA productivity number on the next 12th, there are also the numbers from private companies that will try to establish this climate x productivity relationship over the next few days. Some start putting numbers between 173 and 175 bushels/acre. Between August 22 and 25, there will be the traditional Profarmer’s crop tour, which is never intended to match the USDA numbers, but to present its view on the conditions of crops and productivity potential.
It will certainly be a month with strong volatility still due to weather variables. Signs of an improvement in the weather can promote lows as fast as the recent highs. This is also a strong period in terms of new numbers by USDA and private companies, which will drive the CBOT prices.
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