Corn futures ended flat on Tuesday as investors took profits after updated forecasts raised the chance of rain in the eastern U.S. Midwest, but an expanding drought in the world's top grain exporter kept the market on a bullish track.
Calls for upwards of an inch to 1-1/2 inches of rain this week and next for Indiana, Ohio and Kentucky also weighed on soybeans, feeding hopes that damage from the worst U.S. drought since 1956 can still be repaired by the moisture.
Spot contract September corn rose to a high of $7.96-1/2 at the Chicago Board of Trade (CBOT) -- a 13-month peak and just short of the record high of $7.99-3/4 set last summer. New-crop December corn ended 0.2 per cent lower at $7.71-1/4 (all figures US$).
CBOT wheat prices were mostly lower, but spring wheat futures traded at the Minneapolis exchange were higher amid concerns over drought damage as the crop, centred in North Dakota, neared harvest.
In fact, MGEX March wheat futures, though thinly traded, hit a contract high and crossed the $10 mark for the first time in the life of the contract. The more actively traded December came within 1/4 cent of the $10 level.
A Reuters poll of 13 analysts suggested that the drought was continuing to shrink the U.S. corn crop, with yields likely to drop seven per cent from the U.S. Department of Agriculture's estimate a week ago to 137.2 bushels per acre.
The corn crop's potential has shrunk from record large proportions to the smallest in five years as greenhouse-like conditions suddenly turned dry and temperatures soared to the triple digits Fahrenheit.
The drought has devastated fields at a time when a bumper harvest was needed to bolster three years of razor-thin stocks in the United States which are eating into margins for meat companies and ethanol producers.
Ranchers unable to meet soaring feed costs and whose pastures have been laid waste by the drought have begun liquidating herds, which could translate into higher prices for meat next year.
There could also be global repercussions as much smaller crops in the U.S. stir food inflation, which had been on the wane earlier in the year, as early planting after the mildest winter in decades promised a bumper harvest of U.S. corn and soybeans.
But gains in food prices could be more tempered than the crisis in 2008 as U.S. crude oil is well below its peak of $147 a barrel and supplies of rice are abundant in Asia.
Corn prices have surged 45 per cent this summer, with analysts expecting the crop to deteriorate further as the drought remains in place through July.
Grain importers have sat on their hands so far, waiting for lower prices during the harvest this fall before snapping back into action. But that may make matters worse if they all return at once.
"Demand will shrink and could come to a sudden halt," said grains analyst Tim Emslie of Country Hedging.
Analysts said the corn crop in parts of the U.S. Midwest, which produces the bulk of U.S. corn and soybeans, was too far gone to be revived by rains. But the soy crop still has chance since it sets its yields in August.
"Based on my conversations with producers, I would say 75 per cent of the corn crop in the heart of the drought is beyond help," said grains analyst Mike Zuzolo, president of Global Commodity Analytics & Consulting in Lafayette, Indiana.
The U.S. drought, deemed the worst since 1956 by the National Oceanic and Atmospheric Administration, has been centered in the Midwest, but there were signs it is expanding north and west which would put more crops at risk.
Yield estimates fall
On Monday, the USDA offered fresh evidence of further damage to the crops. The portion of the corn crop it rated in good-to-excellent condition fell nine percentage points for a second week to 31 per cent.
The soybean crop was rated 34 per cent good-to-excellent, down six percentage points from the previous week and one point below forecasts for 35 per cent.
November soybeans closed unchanged at $15.90-1/2 after hitting a contract top of $16.07.
September wheat was up 0.06 per cent at $8.85 a bushel, a 13-month high, while December crossed $9 for a second day before easing.
European milling wheat futures closed higher, erasing earlier losses. Benchmark November was up 0.6 per cent at 266.25 euros a tonne after briefly hitting a contract high of 269 euros soon after the open.
Weather problems were also reported in eastern Europe, with key Black Sea country Kazakhstan preparing for a below-average grain crop this year due to an "alarming" drought in the Central Asian country's main grain-growing regions.
As an example of how rising prices feed into bottom-line inflation, foodstuffs make up 15.24 per cent of the euro zone inflation basket.
The United Nations food agency said earlier this month that the U.S. drought was expected to see global food prices snap three months of declines in its July figures.
-- K.T. Arasu writes for Reuters from Chicago. Additional reporting for Reuters by Sybille de La Hamaide in Paris and Colin Packham in Sydney.