First Since Dry Spell Worsened Into Drought : USDA to Assess Quality in Critical Report on Crops

From the Washington Post

Farmers, grain traders and food processors will finally get a look today at what the drought is doing to the nation's corn, wheat and soybean fields when the Agriculture Department issues its new estimate of crop production.

Today's crop report is the most critical in years, the first official assessment of U.S. farm production since what had been merely a dry spring deteriorated into a drought of historic proportion.

In parts of the Farm Belt, it hasn't rained since the last government crop report came out a month ago, leaving no doubt that today's projections will be down drastically.

Because of the drought, the Agriculture Department is going farther that it usually does in its July reports, adding assessments of the quality of the crop to the regular July census of the quantity of land planted with several important foods, USDA's Ray Bridge said.

Without an official estimate of how badly crops have been hurt, buyers and sellers of grain have been operating in the dark. Like horseplayers trying to pick a winner in a night race with the lights out, they've been forced to rely on the sound of thunder, a whiff of the field and an occasional tip from a tout to try to figure out how much crops are worth.

The result has been the most erratic farm commodity market ever. Grain prices are up as much 50% since last spring but have been swinging wildly because of uncertainty about the drought's impact on yields. Prices on the Chicago Board of Trade have gone pounding upward faster than the thermometer can rise some mornings, only to plummet like driving rain a day later on the mere prospect of a break in the weather. In one gut-wrenching cycle the price of corn dropped 40 cents a bushel in 48 hours, then climbed back more than 30 cents in the next two days.

"The marketplace tends to react to uncertainty with volatility," William Seale, a member of the Commodity Futures Trading Commission, explained at a congressional hearing last week. "We have a marketplace trading on expectations of traders, where there is tremendous uncertainty."

The roller-coaster prices have resurrected some farmers' long-held suspicions that prices are being rigged by traders, but Seale said government regulators have seen no evidence of that.

The government doesn't regulate the buying and selling of grain itself. The CFTC oversees only trading in futures--contracts to buy and sell grain for delivery at some future date. For years, however, futures prices on the Chicago Board of Trade have been the benchmark for grain sales all over the country.

Ordinarily grain prices are driven by supply and demand--in this case, supply or lack of it--but with no official measure of production, the weather and psychology have taken over.

A cartoonist recently drew a character proclaiming: "I don't read the weather report anymore, I just watch the commodity market," but in reality it's been the other way around. The grain traders can't find out how the corn is really doing, so they have to depend on weather reports and perceptions of the drought to determine what grain is worth at any given time.

When corn and soybean prices skidded last Friday despite no sign of rain, veteran Dean Witter Reynolds trader Victor Lespinasse complained to Reuters news agency: "It's inexplicable to me. I don't understand it. And I don't know anyone who does."

Regardless of the risk of betting wrong when prices are swinging so violently, those in the grain business have no choice. "The volatility of the market increases your risk," making it essential to try to minimize those risks in the futures markets, said Jim Whitaker, vice president of grain marketing for Southern States Cooperative, whose farm supply stores and grain elevators dot Maryland and Virginia and four other states.

Southern States can't afford to find that the grain it buys today from a farmer is worth 40 cents a bushel less tomorrow, so "our corporate policy is that we should be hedged at all times," Whitaker said.

"You can get a bad kick in the head if you're not hedged," said Whitaker. That means that when the co-op buys a truckload of grain (at a price based on futures in Chicago) it sells a futures contract to deliver that grain at Tuesday's price. Then if grain prices go down, Southern States will still be assured of selling that particular load at a profit.

When the markets are as volatile as they have been, he said, "you attempt to make the transactions simultaneously," closing the deal with the farmer while on the phone with the futures trader in Chicago. When someone wants to buy or sell grain after the futures market has closed, Southern States often will "pre-hedge" the deal by lining up the futures contract first.

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