Corn Belt Drought Elevates Summer Volatility
3 Min readArticle30 Jun 2023
Corn Belt Drought Elevates Summer Volatility
At a Glance
Drought conditions in the early summer have resulted in some of the lowest corn quality ratings in years across the Corn Belt
Volatility in Corn futures in June at times surpassed June 2022 levels on fears of low yields
Cornstalks sway in the breeze and (corn-fed) ‘dogs are on the grill: American agriculture is always front of mind in the summertime. Weather, planting, harvest, and stocks all impact field crops in the United States throughout the summer months, making the season the most volatile of the year for U.S. corn. The present year, however, brings unique challenges and exceptional volatility, as drought has ravaged the American upper-Midwest corn-growing regions in early summer 2023.
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Lowest Quality Ratings in Years
According to the late June USDA Crop Progress report, only 26% of corn in Illinois was rated as good or excellent for the week ending June 25, 2023; the lowest percentage of Illinois corn to see such rating at this time of year since 1988. In Indiana and Iowa, the percentage of corn rated as good or excellent hovers near levels last seen in 2019, a year of “biblical” levels of spring rain.
Crop Progress and Condition, Percent of Corn Rated Good or Excellent since 2012
The current drought has propelled volatility in June 2023 to meet and at times exceed June 2022 levels, and approach a 12-month peak, according to the CME Group CVOL Index.
Summertime Volatility and Seasonality
Field crops such as corn demonstrate seasonality, or regular patterns of supply and demand over the course of the calendar year. In the United States, corn is planted in the spring and harvested in the fall, with the specific time of planting and harvest dependent on the particular conditions of the year.
CME Group Corn futures are listed for expiration in March, May, July, September and December. Midwestern Corn that is harvested in the fall, after drying in the field, is deliverable by November or December and serves as the underlying physical commodity for December Corn futures. As such, December[1] Corn futures are referred to as a “new crop” instrument because the grains deliverable against the futures have been newly harvested. May Corn futures, conversely, are an “old crop” expiry, because the grain deliverable against May Corn futures has been in storage since its harvest the prior autumn. Relative Corn futures prices tend to peak in the summer, as the old crop ages and supply tightens.
[1] While the trade treats December as the new crop corn futures, the USDA corn crop year actually begins on September 1st to account for the earlier Southern harvest.
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Corn Seasonality in the United States
As old crop corn is sold and stocks decline throughout the summer, the health of the new crop, which is in the process of growing, becomes of increasing importance. All eyes turn to the corn in the ground, which is experiencing the most critical period of its growing season in the United States during the months June through August. Weather conditions, such as temperature and rainfall, can greatly impact crop development and yields. Unexpected circumstances including drought, flooding or extreme heat between planting and harvest can significantly affect the supply dynamics of corn, leading to increased volatility in futures prices.
New crop instruments experience distinct market dynamics from old crop instruments. Extreme summer weather, for example, may impact new crop instruments more dramatically than it does old crop, since it may affect yields.
That is one reason why more Corn market participants are looking to short-dated new crop options contracts to hedge against sudden price swings due to changing weather. The latest tool available in 2023 are weekly options on new crop corn, which expire each Friday from February through August.
The Year Ahead
The U.S. National Oceanic and Atmospheric Administration (NOAA) is predicting a long, hot summer in much of the United States due in part to the departure of La Niña, a cooling force and an anticipated El Niño, a warming influence. Although NOAA previously predicted temperatures in the corn-growing powerhouse states of Indiana, Illinois, and Iowa to be normal relative to historic averages, the agency has revised its forecast to include likely hotter-than-average conditions in the upper-Midwest.
Temperature Outlook, July-September 2023
No matter what the future holds for corn, the summer months bear close watch as weather will impact prices, and global supply can change according to the level of rainfall. Learn more at www.cmegroup.com/agriculture.
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