While droughts are seasonal events, they really are not one-year events or, at least, their effects persist beyond the growing year in which they occur. And this goes beyond simply lower production numbers and inventory. It has to do with soil moisture, feed demand and the overall demand destruction caused by the higher prices — basically how those higher prices affected the entire supply/demand chain on a global basis.
And as droughts go, last summer’s drought was major, and you can see that while the prices of corn, wheat and soybeans have come down off of the summer 2012 highs, they still are elevated (see “Drought hangover,” below) .
Veteran grain trader Tommy Kent Crouch called last year’s drought the worst he experienced in 46 years of trading. Yet despite that, he was surprised that soybean yields ended up much better than forecast. And while we go into the 2013 growing year with tight supplies across the entire grain complex, surprises still happen, as with the first quarter U.S. Department of Agriculture (USDA) carryout number that came in better than expected, causing corn to move limit down in late March.
“A lot of traders didn’t expect those numbers to be so bearish,” says Peter Mooses, senior commodities broker at RJO Futures. “The stock just pushed down the market and changed the outlook for the short-term.”
Corn stocks came in nearly 400 million bushels better than expected, leading to the sell-off. Soybean and wheat numbers also were better than expected, but corn was the driver.
While the supply situation was not as tight as the trade expected, it still is tight and prices still are historically high as the planting season gets into full swing.