Fears spread Monday among traders of U.S. agricultural commodities about the worsening drought conditions across the Midwest, driving prices up the allowable daily limit on five CME Group corn contracts. At the close of trading, the July CME corn contract was up the maximum daily limit at $6.31 per bushel.

Adding to the fear is a weather forecast that shows little possibility for rain. “The two week forecast holds warm temperatures and little hope for moisture across the Midwest growing belt,” says Joe Kerns, managing director, Kerns and Associates, Ames, Iowa. “We have been borrowing from moisture reserves for quite some time now and any further deterioration will be pronounced.”

Kerns believes that the pace of crop damage could accelerate in the hot, dry growing conditions. “Additional damage to the crop from this point forward will likely be logarithmic.”

“Last week’s forecast held out more hope for rain across the driest areas of the Corn Belt, particularly Illinois and Indiana,” says Marty Foreman, Doane senior economist. “Now, along with the continued dryness, temperatures are climbing which adds to the crop stress. These weather conditions trump everything else.”

Kerns said that his firm was buying calls on CME Group’s August corn contract on Monday.  “The options are horrendously priced and I hope we do not need the coverage.”

While Kerns believes the pork market and the corn market can trade independently for an extended period, he advises  livestock producers to pay close attention to risk management strategies. “I would not want to miss profitable forward hog sales just because the grain market is dealing with dry conditions.”

The possibility of a worsening drought is also driving soybean prices higher with the July contract closing Monday at $14.83, up 40 cents per bushel. “Sell orders on soybeans are non-existent and there is no practical top that I can see in the bean market,” Kerns says. “Technically, the run to $14 sets up a goal at $17.”

While the domestic drought situation is causing significant angst among U.S. farmers and livestock producers, Kerns also is very concerned about faltering world economic conditions.  “My biggest fear is the world economic uncertainty,” he says. “Crude oil trading below $80 does not portend health.”

Kerns fears price erosion in U.S. commodities if the world economic woes continue to deepen. The price of corn in the U.S. is currently trading at levels higher than the rest of the world," he says. “We’re not competitive on the world corn market. In September 2008, the price of corn fell 40 percent so I respect the ability of the market to surprise us at any time.”