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Corn, soy rise 2% on drought, momentum buying

ReutersCorn plants are seen in a drought-stricken farm field near Evansville, Indiana, July 18, 2012.

CHICAGO (MarketWatch) -- Soybeans and corn futures rose more than 2% Monday as parched fields and a bleak outlook for this year's crops lured investors into one of the best-performing assets this month.

Soybeans for November delivery (SX2) , the most active contract, rose 42 cents, or 2.6%, to $16.43 per bushel on the Chicago Board of Trade. November soybeans have gained 15% from the end of June, but are down from a record high of $17.57 per bushel.

December corn (CZ2) , the most active contract, was up 21 cents, or 2.6%, at $8.14 a bushel on the Chicago Board of Trade. It was followed by the front-month September contract (CU2) , up 21 cents, or 2.6%, to $8.20 per bushel, nearing the record high of $8.24 per bushel. The December contract is up 28% for the month, and the September contract is up 30% for the same time period.

Throughout the growing season, corn and soy have faced a drought and high temperatures. Approximately 80% of the states in the contiguous U.S. are experiencing moderate to severe drought conditions, according to the U.S. Drought Monitor, run by the National Drought Mitigation Center and the U.S. Department of Agriculture.

Corn has been hit harder than soybeans, as it is more dependent on rain and milder conditions earlier in its growing season. While parts of the Midwest did see scattered showers this weekend, it was too late for the corn crop.

"The bottom line is… the corn is not going to be saved," said Darin Newsom, an analyst with Telvent DTN in Omaha.

Although a record acreage was planted in the spring, corn yield estimates have steadily declined since June by both private and government entities. Nothing has happened in July to improve the outlook for corn.

"It's just the continuing process of farmers getting in the field and seeing firsthand just how poor the yields are," said Mitch Kasper, principal for Midwest AG Investors, in an email interview, about the corn crop. However, there's still some hope left for soybeans.

"Rain can still have a positive impact on beans for a few more weeks," Kasper said.

According to the National Weather Service's website, however, precipitation is not forecast for much of the central Midwest for the rest of the week.

Grain and soybean futures have been surging since mid-June, as the drought conditions throughout much of the key growing regions stunted crops.

The sudden rally has outstripped gains in other investments. Oil futures are up about 5% this month and gold has gained 1%. The S&P 500 (SPX) has added 1.5%.

Financial speculation piling onto recent gains -- and the unknown of how much corn and soy buyers will trim demand because of higher prices -- is also stoking Monday's rally, analysts said.

"It's not crop numbers, it's not condition numbers, it's how much higher can money push this market until the money is gone," said Newsom. "When you get up to these levels, there's no real clear way of knowing what the high will be."