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Corn rallies 5% as near-drought threatens Midwest

CHICAGO (MarketWatch) -- Corn futures rose more than 5% Monday as investors grew concerned with near-drought conditions and high temperatures threatening crops in the Midwest.

Corn futures (CZ2) , settled up 37 cents, or 5.3%, at $7.30 a bushel on the Chicago Board of Trade, after active trading at limit up on Monday. Corn has gained about 15% this month.

The Midwest's heat wave and lack of rain over the past week have affected the outlook for this year's corn crop, contributing to gains on Monday after they were down on Friday.

Although the U.S. Department of Agriculture is set to release a corn data report on Wednesday, Telvent DTN Senior Market Analyst Darin Newsom says that continuing investor expectations on weather are more likely to hold sway over corn futures. He says that a lack of rain over the weekend probably contributed to Monday's gains, and could continue to affect futures for the rest of the week and summer.

"I'm not seeing any change in (weather) patterns," he said in a telephone interview. Unless something in the weather patterns change, "we're looking at a summer's worth of problems."

However, a significant change in weather patterns -- specifically, more rain -- isn't expected for most of the Midwest.

"For the next two weeks, we're looking for below normal precipitation for much of the country," said Jim Allsopp, a National Weather Service warning coordination meteorologist based in Chicago. Allsopp said that save for small regions in Texas, Arizona, and New Mexico, the West and Midwest aren't expected to get as much precipitation as normally expected.

That will probably affect corn futures trading, according to Midwest AG Investor Principal Mitch Kasper.

"I think this market is almost 100% weather driven," Kasper said in an email interview."We have reached a point in most areas where the question is not if yields will be low, it's will there be any yield at all."

Kasper said that although a record number of acres have been planted, the corn crop would likely have a lower yield than expected. The USDA reported in its June Crop Report that 96.4 million acres of corn were planted in this year's crop -- a 5% increase from last year's crop.

In its June Crop Production report, the USDA also showed that temperatures were higher, and precipitation lower, in May 2012 than they have been historically, which helped spring planting off to a record start. However, as temperatures remain higher than normal, summer weather is affecting those same record-breaking corn plantings.

"We are about three weeks away from losing a huge chunk of the corn crop," Kasper said. "Even if we get soaking rains I would expect yields to be 10-15% lower than last year."