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Few farmers in America’s corn belt have seen anything like it. Only weeks ago, they were looking at a record-breaking harvest. Those hopes are fast turning into a mirage.

The hot summer in the US, the world’s biggest exporter of corn, soyabeans and wheat, could have far-reaching effects on global agricultural markets, where memories of the 2007-08 food crisis are still fresh, and prices have been volatile on the back of a drought in South America.

Since mid-June, corn futures – against which the first sales of this year’s crop will be made – have jumped 30 per cent. Soyabeans, used in animal feed, have returned to the highs of the last food crisis. Wheat has tracked the prices of the other crops.

Temperatures of nearly 40C in top corn-growing states such as Illinois and Indiana have forced analysts to discard their upbeat early-season predictions. As recently as June 14, the US Department of Agriculture’s official monthly feed outlook called the corn crop “promising as condition rates remain good”.

On Monday, investment bank Goldman Sachs raised its price forecasts and Morgan Stanley declared “a return from complacency” in agricultural markets.

The extreme heat in the corn belt shows how such events can quickly alter the direction of globally traded raw materials markets. As the US and Chinese economies have slowed, agriculture was the sole commodities sector to rise in the first half of 2012, according to Standard & Poor’s. The price gains have been due in large part to the drought in South America and now the US.

Mike Nichols is among those feeling the heat. A farmer in southern Indiana, he took advantage of an unseasonably warm spring to plant quickly, seeing it as a way to let tender corn stalks take firm root before the worst of the summer heat in late July and August. Government data show 96 per cent of the US corn crop was planted by May 20, 15 percentage points more than the average for that date.

“I was done the earliest I’ve ever been in my generation, my father’s generation and maybe my grandfather’s generation,” says the 55-year-old farmer.

By June, suffocating heat had arrived – just as his 650 acres of corn were in a fragile pollination stage when final yields are most vulnerable to bad weather. Monday, temperatures in his town of 2,000 people were forecast to reach 39C.

The effect of the heat has been magnified by months of low rainfall. “Imagine you’re hanging houseplants. If you don’t water it for four weeks, you can imagine what it’s going to look like. That’s, in essence, what this crop is doing: it’s rapidly running out of moisture,” says Bob Nielsen, a Purdue University agronomist.

Brian Fuchs, climatologist at the National Drought Mitigation Centre, said: “The conditions that allowed for the good planting and good harvesting are the same reason we’re seeing this drought.”

At the Wabash Valley Grain storage elevator in Princeton, Indiana, merchandiser Nick Michel says farmers who sold some of this year’s crop in advance are worried they may not be able to honour contracts.

“Losing up to half our crop around this area could be a reality,” he says.

Monday, CBOT December corn rose for the sixth day in seven, to $6.57½ a bushel, the highest since last September. Rabobank last week warned prices could top last year’s record $7.99¾ level if the dry conditions in the corn belt persisted.

If the hot weather continues, the market’s focus will move from corn to soyabeans, which mature later. The market was already jittery after disappointing harvests in Argentina and Brazil, and “global supplies are tightening every day”, the USDA said in a report last month.

CBOT November soyabeans have gained 10 per cent since mid-June, while on Monday front-month CBOT July soya meal, used in animal feed, was 2.2 per cent below its all-time high.

In the US, farmers planted 5 per cent more corn and 1 per cent more beans this year as they chased high prices. This had led to expectations of the biggest corn crop and third-largest soyabean crop in US history. In its last estimate before the worst of the heatwave, the USDA forecast the average corn field would yield 166 bushels (4.2 tonnes) an acre, an all-time high.

Analysts now debate not whether these crop and yield estimates will be cut, but by how much. “At this point, if we get a yield of 161, we throw a big party because it doesn’t look like it’s going to happen,” says Hussein Allidina, head of commodities research at Morgan Stanley.

Mr Nichols’ farm in Indiana normally harvests about 180 bushels an acre of corn. This year he is hoping for just 125 bushels. “We have had several years in a row of very good crops,” Mr Nichols says. “The good Lord is more in control of farming than the farmers are. You’re only as good as how much rain you get.”

Nobody is predicting a repeat of 2007-08. But, if conditions worsen, the effect on markets could be almost as severe.

Copyright The Financial Times Limited 2017. All rights reserved.
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