The worst U.S. drought since Ronald Reagan was president is withering the world's largest corn crop, and the speed of the damage may spur the government to make a record cut in its July estimate for domestic inventories.

Tumbling yields will combine with the greatest-ever global demand to leave U.S. stockpiles on Sept. 1, 2013, at 1.216 billion bushels (30.89 million metric tons), according to the average of 31 analyst estimates compiled by Bloomberg. That's 35 percent below the U.S. Department of Agriculture's June 12 forecast, implying the biggest reduction since at least 1973. The USDA updates its harvest and inventory estimates July 11.

Crops on July 1 were in the worst condition since 1988, and a Midwest heat wave last week set or tied 1,067 temperaturerecords, government data show. Prices surged 37 percent in three weeks, and Rabobank International said June 28 that corn may rise 9.9 percent more by December to near a record $8 a bushel. The gain is threatening to boost food costs the United Nations says fell 15 percent from a record in February 2011 and feed prices for meat producers including Smithfield Foods Inc. (SFD)

"The drought is much worse than last year and approaching the 1988 disaster," said John Cory, the chief executive officer of Rochester, Indiana-based grain processor Prairie Mills Products LLC. "There are crops that won't make it. The dairy and livestock industries are going to get hit very hard. People are just beginning to realize the depth of the problem."

David Fuller's view The seriousness of this US drought is illustrated by these recent prices surges which have yet to show any loss of momentum: corn (weekly & daily), soybeans (weekly & daily) and wheat (weekly & daily). The full extent of this damage during the pollination period for corn will not be known until the drought breaks and a partial recovery occurs. However, the damage to US corn's eventual yield this year is very likely to be reflected in the shops by upward pressure on prices for beef, pork, chicken, eggs, milk and butter later this year and in 2013.

Potential shortages for soybeans and higher prices for wheat will most likely also contribute to food price inflation. This may be mitigated somewhat in Europe by better yields due to cooler and wetter weather on the Continent and in the UK and Ireland.

I have not traded these grains but anyone with long positions may wish to protect them with trailing stops that are within the daily limit ranges. Accelerated trends of this type are usually followed by sharp reactions once prices lose upside momentum and a period of churning is not uncommon.

Note - prices for corn, soybeans and wheat shown above were taken at approximately 5pm, BST.