With much of the corn crop now above ground (97%), market participants have turned their attention to weather conditions and the potential impact that dry, hot weather can have on crop yields. The guessing game will continue for the next 6-8 weeks.

However, given that the crop was put in the ground earlier than normal, the next 4-6 weeks will be critical. So far, June has offered some bullish support for the market even as a number of macro factors (China demand, Euro blowup, general U.S. economy) remain generally bearish for corn values. December corn futures were up 14¢ yesterday and gained another 4¢ in overnight trading on concerns that a spell of dry weather in Eastern Iowa, Indiana and Illinois could slow crop progress and take its toll on the developing crop. There is some speculation among market analysts that lower-than-normal precipitation could also cause USDA to cut back its estimates for a record corn yield of 166 bu./acre this fall.

Any potential crop damage has yet to show up in the crop survey data. The weekly crop progress report issued last night indicates that, for the week ending June 3, 72% of the U.S. corn crop was in good or excellent condition. This was about the same as a week ago and defying expectations for a modest deterioration in conditions.

Rather, the report indicated a 2% change from good/excellent, with the other categories exactly the same as a year ago. As you can see from the chart above, the corn crop is generally in good shape in June and it’s not until early July that we see the paths of various crops diverge. Still, all eyes are on precipitation given the size of the current crop plantings. The bottom chart from NOAA shows how precipitation in the last 30 days compares to normal rainfall for this period. In some areas of Iowa, Illinois and Indiana, rainfall is running 4-6 in. below normal.

Because of residual moisture, it’s likely this isn’t having an immediate effect but, should current patterns continue and be accompanied with higher temperatures, then eventually this could start to affect the crop. Some private estimates already have started to pencil in yields that are below 160 bu./acre. But again, the thing to note is that we are still early and this crop could go a number of different directions.

Farmers and livestock producers would also do well to not just look at weather patterns at home but also the gathering storm clouds in financial markets across the Atlantic. There may be some fatigue with the dysfunctional state of affairs in Europe. Nevertheless, how the Euro Zone handles the crisis will have a profound effect in commodity markets. There is little corn that moves between the U.S. and Europe but there is plenty of money.

And when that money runs for the door, seeking shelter in bonds and other instruments, it tends to hit commodities indiscriminately. There is a sense that the Euro Zone problems will reach finality in the next three months – just in time for harvest. Let’s hope politicians and bankers have learned a thing or two from fall 2008. Otherwise, it could prove to be an even more expensive remedial course.