Del.icio.us  Digg  facebook  MySpace  Twitter  Google  Bookmark Me  LinkedIn  StumbleUpon  Permalink

Expect Lower Yields in the Corn Belt

Elwynn Taylor, ISU climatologist, doesn't expect 2006 corn and soybeans to equal the yields across the Corn Belt that were harvested the past two years.

"The risk of severe drought is not extremely high at this time," he says. "But the odds of having weather this summer that will result in yields that are below the trendline are favored for 2006," says Taylor. "The last widespread drought in the Corn Belt was 1988. To go 18 years without a major drought is not uncommon, but more than 23 years is unheard of."

Odds increase for drought

The risk or odds of having a major drought in the Corn Belt during this year or within the next few years is increasing. Best chances for normal rainfall are in the eastern Corn Belt this year. Moving farther west, odds increase of drier weather and less rainfall than normal for those corn-growing regions.

The Great Plains area is likely to be hot and dry. It's possible some of the heat from the Great Plains could drift into the western Corn Belt.

Illinois could be the battle ground state for establishing the dominant weather trend for this summer. The conditions that develop there could go a long way toward determining the size of the U.S. corn crop this year.

Weather impacting futures prices

Looking at deferred corn contracts in the $3-plus range on the futures market, are market advisors anxious to have farmers lock in some sales at these prices? Or is it too early to be pricing ahead for the 2007 and 2008 crop?

"I think a case can be made for locking in such prices on some of your expected corn production," says ISU economist Bob Wisner. "However, I suggest caution. Elwynn Taylor, ISU Extension climatologist and others have been telling us for some time now that Iowa and the Midwest is in a high-risk period for a major drought to occur. That's based on long-term weather cycles."

Also, with extremely rapid growth in ethanol demand, if we run into weather problems next year or the following year, we could see a sharp run-up in corn prices, adds Wisner.

Forward price some 2006 corn now?

The threat for another run-up in crop prices is possible. Distant corn futures have already discounted a substantial amount of that into prices. In fact, there is a bit of a weather premium now in the market, particularly out to 2008, notes Wisner. 

The last major widespread drought across Iowa occurred in 1988. That's 18 years ago. The weather cycle is somewhere between 18 and 23 years on a major drought in Iowa, notes ISU's Taylor. Some people would say we had a drought last year. But it didn't qualify because much of Iowa didn't have a drought last year. We had great weather in the northern and western part of the state and incredible yields, almost as good as the year before.

Wisner is cautious about those deferred futures contracts. They look like low-hanging fruit. Other market analysts agree with Wisner. Tom Pfitzenmeier of Summitt Brokerage in West Des Moines says "there's a lot of crop to grow between now and then and also a lot of demand - big potential demand from China. China is what is helping drive this whole energy situation we have now. China is an economic force to be reckoned with."