The months-long drama over wrenching changes to the Chicago trading pits may have caused grain traders and hedge funds to miss early signs of the worst Midwest drought in a quarter century, partly explaining the latest ferocious surge in prices.
For veteran analyst Rich Feltes, there is no question that this week's "weather market" - an industry term to describe a period in which grain prices react sharply to volatile Midwest meteorological conditions - is the most frenzied he's seen since the 1980s, when two different U.S. droughts threatened crops.
There are plenty of fundamental reasons to explain the near 20 percent percent surge in December new-crop corn price this week including that soil moisture levels in No. 2 corn producer Illinois are as low as they were during the disastrous drought of 1988.
Now, after a warm winter with little snow; record triple-digit heat is baking the crop just as it pollinates, the period when corn plants start producing grain. A successful pollination is needed as corn inventories are precariously low.
It's even drier in Indiana, the nation's fifth-largest producer of corn last year.
"Indianapolis is on pace for the driest June ever. It is already the driest for June since 1988 and if the area doesn't get any rain by Saturday it will be the driest June on record," said Andy Karst, a meteorologist for World Weather Inc, Kansas City.
TRADERS' ATTENTION HAD BEEN DIVERTED
The abruptness of the corn market rally and its unrelenting nature suggest to many a surprising degree of complacency, with even the smartest players seemingly overlooking the gathering signs of what may become the most damaging drought since 1988.
Hedge funds turned bearish on corn earlier this month for the first time in two years, regulatory data showed.
"The market has been distracted by a lot of other issues," says Feltes, vice president of research for broker R.J. O'Brien LLC and a sage among Chicago traders for more than three decades.
"A lot of analysts, me included, have been dealing with such things as changes in report times and changes in trading hours, so I think a lot of us had gotten complacent."
Instead of watching the weather, much of the grain trading community had been debating, decrying or bemoaning the CME Group's move to extend its trading day for Chicago Board of Trade (CBOT) grains to a continuous 21-hour session, a dramatic change that has roiled the tradition-bound market.
The most disruptive shift since the advent of electronic trading and its hyper-growth in the 21st century was worsened by a series of embarrassing regulatory glitches and unforeseen complications. The longer hours went into effect on May 21, a week later than first planned, but further adjustments are still being made. The settlement period was pushed back to 2 p.m. CDT (1900 GMT) only this week.
The whiplash reversal in the market speaks volumes about the once buoyant confidence in farmers' ability to replenish dwindling grain supplies, and underscores the investment community's growing concern that crop yields could fall far below the Agriculture Department's predictions.
The agency's report due out on Friday is not expected to provide any greater insight -- it will focus on quarterly stockpiles and planted acres, not productivity.
In more recent times, such "weather markets" have followed a relatively predictable pattern: A rally one day, a downturn the next. Weather forecasts change slowly, and the damage is rarely done overnight. And like the quick shifting nature of weather, disaster has nearly always been averted.
This one feels different, veterans say.
"It's become quite an emotional situation," said Jerry Gidel, an analyst for Chicago-based trade house Rice Dairy LLC.
Speculative buyers have led the charge. In the past four days, commodity funds bought 72,000 corn contracts the equivalent of 360 million bushels, nearly 20 percent of Illinois output, the No. 2 producer.
"Funds had been losing money and were getting out of the corn market and now we see the corn crop isn't going to be as big as what everyone was expecting," said Paul Georgy, president of Illinois research and advisory firm Allendale Inc.
The final trigger came in the form of weekend weather forecasts that appeared to awaken the market en masse, provoking a scramble to cover shorts or go long on the next crop.
"I think the market had focused on factors other than supply side economics," said Georgy. "This weather surprised us, funds, weather forecasters and just about everybody."
There had been warning signs. Weekly crop condition reports had shown steady deterioration even before Monday's U.S. Department of Agriculture (USDA) report that showed only 56 percent of the U.S. corn crop was in good-to-excellent condition, down 7 percentage points from the previous week and nearly 20 percentage points below the rating at the beginning of the year.
Low soil moisture levels, a historically warm and dry winter and a lack of soaking spring rains set the market up for a perfect storm.
"People have been almost ignoring fundamentals until now," said Gidel, a Chicago grains analyst since 1980.
If anyone understands the uneasy feeling in the pit of many traders' stomachs these days, it is Feltes.
Back in 1983, when he was a young man making the jump from crop scout to analyst, Feltes recalls the drought that sent prices surging in early July, while the corn plants were pollinating. Prices for the third-month contract -- new-crop December 1983 -- rose about 40 percent or a dollar per bushel from roughly $2.70 in early July to peak at $3.76-1/2 by mid-August, a major move in that more modest era.
The "weather market" of 1988 was far more dramatic. Prices soared 68 percent, or about $1.50 per bushel, from $2.20 a bushel in mid-May to an early July peak of $3.70. The bull market was over even before the corn plants went through their pollination process, as the new-crop December began tumbling and fell back near the $2.60 level at the contract's expiration at the end of the year.
This time around, the timing of the dry weather market rally is much earlier, hitting fields in large swaths of the Midwest where stalks are already stressed. It is also straining one of the most crucial moments of the plants' life: pollination, a key to high yields.
Now, as Feltes attempts to explain the market's unusual behavior as well as conditions affecting the crop, he feels baffled that he and others were not paying closer attention to something as fundamental to agriculture as the weather.
"End-users were lulled into thinking we were going to have a big crop," he says. "Now they're buying and getting coverage."