The National Weather Service (NWS) has released its outlook maps for the remainder of the U.S. growing season. The NWS is now calling for above-normal temperatures and below-normal precipitation from August through October.

This follows one of the driest Junes and Julys in history. Not only will these conditions cause drought to persist through regions currently impacted, but likely cause the U.S. drought area to expand through the Western Corn Belt, as well.

Analysts are starting to take a closer look at possible harvested acres this year on corn. Given recent weather conditions it is quite likely some corn acres will only make it for silage, if they are used at all. Most analysts believe only 88 percent of the acres planted to corn will be harvested this year. If correct, this would cut final acres by 4 million and tighten production by nearly 1 billion bushels.

While this seems bullish for corn values, it may not be as supportive as thought. This is from the continued reductions we are seeing to corn demand. In the latest supply and demand report the USDA cut corn demand by just over 1 billion bushels. While another reduction this large would be hard to justify, the higher we see corn values rally, the more likely it becomes.

There is still talk in the market on whether the U.S. Environmental Protection Agency (EPA) will alter the U.S. blending mandate this year. By doing so, ethanol manufacturing would slow enough that corn stocks would not be depleted.

It is doubtful the EPA would make such a move until corn yield and carryout can be better determined. If U.S. ethanol margins continue to erode and plants go offline, changing the mandate may not be necessary anyway.

Processing margins on U.S. corn and soybeans continue to weaken. For the past several weeks we have been aware of the negative margins in the ethanol industry, and a growing number of plants are slowing operations, as a result.

We are now seeing crush margins on soybeans tighten, as well. If these two sources of demand do in fact decline, it will greatly impact final carryout numbers, both on old crop and possibly new crop.

Some analysts believe the United States will soon be importing a large volume of corn from South America. This is from an economic point of view only, as it would currently make fiscal sense to use cheap corn from Brazil rather than high-priced U.S. inventory.

The practicality of this may not happen though, as it is easier to slow usage instead and wait for the U.S. market to break. Even if the United States would import Brazilian corn, it is unlikely it would be a large enough volume to impact inventory.

What is more of an issue for today’s market than the possibility of importing South American corn is the probability of depleting domestic soybean reserves. Right now the United States is the only country with an exportable reserve of soybeans. Soybean values have set record highs to try to slow this demand, but so far, it has not deterred buying.

This is from simple demand, but also from currency exchange rates, and how they still allow for profitable buying even at elevated futures.

The cost of dried distillers grains (DDGs) has spiked to record values across the United States. This is from a combination of factors, with the primary one being near-record corn values. This has caused many ethanol plants to slow operation or halt manufacturing altogether, and in turn, cause a shortage of DDGs.

This has pushed DDG values to a level that makes the use of soy meal a more economical choice, further straining the U.S. soybean inventory.

Karl Setzer is a commodity trading advisor/market analyst at Maxyield cooperative. His commentary and market analysis is available daily on radio, in newsprint and on the internet at www.maxyieldcooperative.com

The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.