The futures market for grain products, particularly corn and soybean, retreated from record highs today (10 July) after a two-week run that one analyst described as “breathtaking”. However, rather than signifying the return of stability to the market, it seems likely that traders are catching their breath as they await the USDA’s monthly crop estimates.

US corn and soybean futures saw a sharp rally on the Chicago futures market yesterday, with soybean prices hitting record highs.

The jump came after the USDA confirmed that there has been a decline in the condition of soybean and corn crops in its weekly crop ratings update.

In its report, the USDA said that 30% of corn in the 18 states where the majority of the nation’s crop is grown are now in a “poor” of “very poor” condition. The previous week, this figure had sat at an alarmingly high 22%.

The USDA added that 27% of soybeans were in poor or very poor condition in the 18 states where most are grown, up from 22% the previous week.

Only 40% of corn and soybean crops are rated “good” to “excellent”.

After a knee-jerk reaction that saw corn and soy futures propelled to record highs, prices retreated somewhat today. Chicago Board of Trade December corn was down 13 cents, or 1.8%, at $7.17 a bushel at time of press, after reaching $7.33 a bushel yesterday. Likewise, November soy eased off yesterday’s record high of $16.53 a bushel, declining 0.8%.

However, price reductions are limited by ongoing worries over the expected size of the corn and soybean harvests.

The primary cause for concern is the hot weather that has been seen across the farm belt in the US.

Corn is currently pollinating in many areas of the Midwest. The high temperatures currently being endured can retard the formation of corn ears and kernels. While soybeans develop a bit later in the season, with bean pods developing around August, the extreme weather conditions are also expected to have an adverse impact on soybean harvests.

“The move in corn/SBM futures has been nothing short of breathtaking,” Heather Jones of BB&T Capital Markets wrote in a note to investors. “Record heat and dry weather conditions persisted throughout the Midwest this weekend and while some relief is expected on the heat front over the next week, precipitation is expected to remain below-normal.”

Weather forecasts have predicted that some rain will reach the Midwest this week (and, indeed, rain was seen over Utah late yesterday). However – welcome relief though it is – rain storms will not be able to reverse the damage already done by the drought that has lasted a month and continuing high temperatures are expected to result in high precipitation rates  keeping crop stress high.

A poor soybean and corn harvest is particularly bad news for the US protein industry, which relies heavily on these crops for animal feed.

The likes of Brazilian protein giants JBS, which ownes Pilgrim’s Pride, and Smithfield Foods have already seen profits dented by escalating input costs. During the last financial year, Smithfield – for example – reported an 18% increase in the cost of hog rearing.

Protein groups have largely responded by increasing their focus on value-added packaged meats. However, a steep increase in feed costs would quickly feed through to the bottom line of these firms, who are heavily exposed to the swings of the commodities market. It could be tough to pass on price increases to retailers facing cost-conscious consumers.

Much then, will ride on the conclusions drawn in the USDA’s monthly crop estimates, which are due out tomorrow. The outlook does not look promising.