The price spread between U.S. corn futures for July and December deliveries has plunged to a 20- month low, as traders bet the biggest annual planting in 75 years will be crimped by drought in Iowa and Illinois.
The CHART OF THE DAY tracks the discount between Chicago corn for delivery in December, when U.S. supply typically peaks, and the contract for July, before the harvest. That gap has narrowed to about 32.75 cents per bushel, or 57 percent less than the average in the past year and least since October 2010, data compiled by Bloomberg show. The lower panel shows the historical per-bushel prices of July and December contracts.
The U.S. Department of Agriculture revised its quality rating on June 25, saying that 56 percent of the U.S. corn crop is in good to excellent condition, down from 72 percent three weeks earlier. The nation was projected to provide 40 percent of the global harvest in 2012-2013, about twice the amount of No. 2 China, according to the USDA, based on its estimate that the most acres were sowed in America since 1937.
“If we don’t receive a good widespread soaking rain across some of the key areas in the Midwest, it’s going to be pretty dim,” Wayne Gordon, a New York-based executive director at UBS AG, said in an interview after visiting the region. He correctly predicted in April that soybeans have yet to peak.
The narrowing of the contract prices has occurred as ’’abnormally dry’’ or worse conditions affected 71 percent of the Midwest, the largest U.S. growing region, according to the University of Nebraska at Lincoln. Morgan Stanley said in a report June 25 that “the market has been slow to reflect the crop’s poor condition.” The United Nations has said that a record U.S. harvest is needed to rebuild global grain stockpiles drained by deficits in the past two years.
Harvest losses would squeeze profits of companies including Archer Daniels Midland Co., the world’s largest corn processor and leading ethanol producer, and Smithfield Foods Inc. (SFD:US), the biggest pork processor, whose cost of raising hogs rose 18 percent in fiscal year 2012 because of higher prices for feed ingredients, the company said in a filing last month.
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