KANSAS CITY, MISSOURI, U.S. — Amid rapid deterioration of the U.S.’s 2012 corn crop and mounting concerns about the prospective soybean crop, wheat futures prices followed corn and soy complex markets sharply higher last week and bakery ingredient buyers faced increased uncertainty for 2012-13 prices.

The downward spiral in row crop conditions has dashed flour buyer hopes that 2012-13 would bring a respite from the high flour prices that have prevailed in recent years. At the beginning of the crop on June 1, wheat flour prices (bakers standard patent) hovered exactly in line with the five-year average. The expectation of lower prices was premised on a successful winter wheat harvest, stable world wheat supply and demand conditions, and good spring wheat and corn growing seasons. While the first two preconditions have been achieved and the spring wheat crop outlook remains promising, the successful corn growing season is no longer a possibility. And because the corn/wheat price spread already was extremely tight going into 2012-13, gains in corn futures prices have had an especially direct bullish effect on the wheat market.

Market analysts contacted by Milling & Baking News (sister publication to World Grain) described the corn situation as extremely serious but cautioned that many questions about the 2012 supply picture remained unanswered at present.

Certain facts are known, though. “First and foremost, it is definitely bad,” one veteran market analyst said. “If you look at crop conditions as a proxy for bad, it’s bad, or if you simply look at the weather and aridity — the combination of heat and dryness. For corn, it can be warm or hot if you get rains to ‘heal the wounds.’ But this year we have the one-two combo. The worst of the worst. The drought monitor map. The way the southern Plains looked last year is creeping to all the major growing areas this year. A problem now is the race to who will come out with the lowest number. A couple weeks ago it was 157 bushels per acre. Then it was around 154. Now it’s 137. The lowest I’ve seen so far is 117-130 for a U.S. corn yield. I don’t think we’re there yet.”

Drew Lerner, president of World Weather, Inc., said comparisons with earlier drought years such as 1988 are less helpful than they may appear.

“It’s a serious drought, but one thing we don’t know is how well the new hybrids are handling it,” he said. “In the fields, the corn looks terrible, but there is a lot of variation within one part of a field to others.”

Lerner said many meteorological phenomena have unfolded as expected this summer, but conditions for the drought have reached a point of self perpetuation.

“La Nina was supposed to end in the spring,” he said. “El Nino was supposed to come around late summer. That evolution is under way. That is occurring. It’s later than expected, and the (intensity of the) heat was unexpected. And, with temperatures so hot in June and dryness so pronounced, it has created its own entity. It’s feeding on itself. When the ground gets dry, you lose the feedback moisture potential that supplies the atmosphere and creates thunderstorms. High pressure ridges will tend to persist and become even more intense if conditions are favorable for it to stay.”

Wheat futures closed last week at $9.41 for the Kansas City September contract, up 11% for the week. The price was up 49% since the start of the crop year but remained beneath the season’s high of $9.84 set in May 2011.

Bakery flour prices have not climbed as sharply, up just over 10% since the start of the crop season. The impact of surging wheat futures on the flour market has been dulled by sharply lower cash wheat premiums and sharply higher millfeed prices, with the latter pulled upward by soaring corn prices and the need for supplemental feed as pastures dry up because of the drought.

The strength in wheat prices overwhelmingly has been driven by advancing corn prices, and further gains are likely if weather conditions do not improve.

The continuing problems with the corn crop were spelled out in weekly data from the U.S. Department of Agriculture (USDA) in its July 16 Crop Progress report. The corn crop in the 18 major growing states was rated 31% good to excellent as of July 15, down from 40% a week earlier and compared with 66% at the same time last year, according to the USDA.

Soybean ratings fell, but not quite as precipitously. Soybeans in the 18 major states were rated 34% good to excellent on July 15, down from 40% a week earlier and well below 64% a year ago.

The percentages of corn and soybean crops rated very poor to poor jumped sharply as of July 15 as well. Corn in the 18 states rated poor to very poor was 38%, up from 30% the week ended July 8 and well above 11% last year. Soybeans rated poor to very poor were 30% as of July 15, up from 27% a week earlier and 10% a year earlier. Conditions were especially bad in the eastern Corn Belt. The Illinois crop was rated 56% poor or very poor, and Indiana’s was 71% poor or very poor.

Drought has been unrelenting in the Corn Belt for weeks, although growing conditions to the north and to the west in the Midwest and in parts of the South have been more favorable, at least so far. Crops such as spring wheat, oats and rice, for example, appear to be in better shape than the row crops.

Quantifying the problems with accuracy at this point in the season is a real challenge, Lerner said.

“No one is saying less than 10% of the crop is lost, and most are estimating 15% to 20%,” Lerner said. “Some are saying the worst ever. I don’t think it will be as bad as 1988 when all is said and done, but from a meteorological point of view it will be the hottest we have had and the driest in quite a few areas. We do have favorable conditions in the northwest.”

How sharply do yields fall in drought years? By comparison, corn yields in 1988 fell 29% from the year before, and yields in 1983 declined 28%. In both cases the drought year followed a year of record yields.

By contrast, corn yields in 2011 were not a record — 147 bushels per acre, down 10% from record yields harvested in 2010.

Declines of more than 20% in corn yields such as those that occurred in the 1980s are extremely rare. The only wider year-to-year decline in national corn yields in the 20th century was in 1901 when corn yields fell 35% from 1900 (to 18.2 bushels per acre). A yield of 117 would equate to a 20% decline and 102 would be down 30% from 2011.

“We tend to generalize that July is a big, big deal for pollination,” the analyst said. “The next part, the fill, isn’t as important. We had 71% of the corn crop silking as of last Sunday. We’re probably 10 days to two weeks ahead of normal. It was something we thought would be a blessing but is turning out to be curse. The western Corn Belt is getting hammered this week. It’s pushing 100 for the next 10 days. Over the next phase — can it get worse? Yes. If we continue to hammer the crop with excessive heat, it can get worse.”

From a corn price perspective, the timing of the drought could not be worse, the analyst said.

“We began from historically high levels, and have been for the last couple years,” he said. “The lower the corn crop goes, the more rationing that will take place.”

The average farm price in 2011-12 currently is estimated by the USDA at $6.20 a bushel, the highest annual price ever and up more than 100% from the 10-year average corn price of $3.08. The Chicago September corn futures close of $8.24 1/2 per bushel was the highest corn futures price ever.

Far greater variability remains in the potential outcome for the 2012 soybean crop, but its fate largely will be sealed in the days ahead.

“It is soybeans that has the greatest risk of loss still in front of it,” Lerner said. “It could turn around and turn out better if it begins raining in the next couple weeks. Current forecasts don’t point to that being likely, though I do see some signs of improving rainfall in August. But it may be too little too late.”

The market analyst also emphasized the importance of the coming weeks for the soybean crop and the precariousness of market conditions.

“Soybeans are coming into prime time for the United States,” he said. “We’re coming off consecutive poor crops, and it would be unprecedented from a world perspective to have, in succession, the U.S. down, South America down, and the U.S. down again. We already were tight. Now we’re throwing more fuel into a fire.”

Weather is not the only uncertain variable going into the new crop, the analyst said.

“We have a wild card,” he said. “I read another analyst who said he’d rather try to forecast the weather than what the government might do.”

In particular, questions have been raised over whether the federal government will reduce the ethanol mandate of about 5 billion bushels for 2012-13.

“I don’t think it will be easy to have that happen in an election year, but theoretically they could do that,” the analyst said. “They could do that for biodiesel.”

While not specifically addressing the issue, Secretary of Agriculture Tom Vilsack last week offered remarks about the drought suggesting a position that no special government action was required.

He said the drought should have “marginal impact on food prices” and that the price impact was not likely to be felt in supermarkets until 2013.

While wheat crop conditions have not played much of a role in the current crop drama, observers have expressed concern about the impending El Nino, which often is associated with poor crops in Australia. Lerner said the concerns are valid but also cited reasons for hope the crop would turn out well.

“Eastern Australia is actually in very good shape,” he said. “The wheat is well established. The soil moisture profile is as good as you could ask. They just had rain. El Nino tends to diminish rainfall there, and I am expecting it to trend drier during the reproductive period. If El Nino does not evolve aggressively, we could get by. We are walking a fine line. The crop looks wonderful right now, but there is a risk conditions may deteriorate during August.”