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Drought Scorches America’s Crops: Elements by David Fickling

Corn grows in Leland, Mississippi, US, on Tuesday, Aug. 16, 2022. Corn was stable before a US crop tour that will give more insight into the state of fields in the world’s top producer.
Corn grows in Leland, Mississippi, US, on Tuesday, Aug. 16, 2022. Corn was stable before a US crop tour that will give more insight into the state of fields in the world’s top producer. (Bloomberg)

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Today’s Take: America’s Scorched Crops

When the clouds vanish and the sun is blazing, the difference between crops really starts to tell. 

The most obvious variation is how different farm commodities are responding to the dry weather that has swept the US. Even heat tolerant strains of wheat, soybeans and corn struggle to produce adequate yields in conditions like these, with 39% of the country in the grip of moderate to exceptional drought.

The worst of this weather has been a long way west of the Mississippi, in land less crucial to the major commodity crops, but in the Midwest grain belt the differences are clear. Corn prices are up 8.4% over the past month, a reflection of the grim weather that has dismayed field scouts touring the area in recent weeks. Over the same period, soybean prices have actually fallen 1.4%. That’s in part a reflection of the fact that soy handles dry weather better; some of corn’s wild ancestors thrive in completely waterlogged soils that would kill many other crops. 

Corn’s demand side is also particularly unyielding. About half of America’s corn crop is blended into road fuel, set by the Environmental Protection Agency’s mandates. The volume of conventional corn-based ethanol covered this year is up about 800 million gallons from last year, equivalent to roughly 2% of the entire annual crop.

Set aside the government mandate, and the surging price of oil thanks to the war in Ukraine alone means that ethanol has been trading at a 28% discount to gasoline since the start of March, compared to a 3.7% premium in 2021. That makes higher-blended E15 gasoline a more attractive option for those whose cars can burn it, further increasing demand. Extreme weather may be making corn unusually expensive — at $6.73 a bushel, it’s now roughly 50% above its 10-year average price — but compared to petroleum, even a drought-hit grain crop looks cheap.

Chart of the Day

In most of the world, steel rebar — the rough rods used to reinforce concrete — will always be cheaper than the higher-quality metal that’s rolled into coils and turned into sheets for car panels, appliances, and low-performance piping. Those rules don’t always apply in China, however. Whenever the private sector steel struggles, it’s rebar that outperforms, since so much of it is used in the sort of large-scale infrastructure projects that Beijing uses to stoke demand. That’s happening again now — an indicator of  government support for the economy.

Today’s Top Stories

German power for next year, the European benchmark price, broke through 1,000 euros ($993) for the first time as the region’s energy crisis intensifies. A year ago, it was less than 100 euros.Germany’s economy minister, meanwhile,  proposed tackling soaring energy costs over the longer term by reforming power markets so that prices are no longer coupled to the most expensive supplier.International Atomic Energy Agency Director General Rafael Mariano Grossi  will lead an inspection of the Russian-occupied Zaporizhzhia nuclear plant in Ukraine this week amid safety concerns sparked by fighting near Europe’s largest atomic power station.China’s southwestern province of Sichuan eased emergency energy measures, paving the way for companies including Toyota Motor start resuming normal operations after two weeks of power cuts. Gold  dropped for a second day after Federal Reserve Chair Jerome Powell pushed back against hopes the US central bank would start easing monetary policy soon

Best of the Rest

• Iceberg Research, the whistleblower and short seller, which first raised issues with the accounting of  commodity trader Noble Group Ltd. in 2015, compares Singapore’s lenient treatment of the company unfavorably with the criminal charges brought against directors of Enron Corp. and Wirecard AG.

• Municipal waste, farm residue and recycled plastic could produce 20 million barrels a day of biofuels by 2050, equivalent to a quarter of projected liquid fuel demand, argues Wood Mackenzie.

• A Wall Street Journal video tears down a typical electric vehicle battery to show how hard it will be for the US to bring production of the cells back home, as intended by the Inflation Reduction Act.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

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