U.S. soybeans rallied nearly 3 per cent on Monday on fears that the crippling U.S. drought would further shrink the crop in the world’s top grains exporter. The rally pushed prices toward their biggest monthly gain in more than four years.

Corn futures at the Chicago Board of Trade rose more than 2 per cent, with some analysts saying that the worst drought in 56 years has destroyed large swaths of the crop. Prices were heading for their biggest monthly gain in more than five years.

After the market closed, the U.S. Department of Agriculture’s weekly crop progress report showed that the condition of the corn and soybeans each fell by 2 percentage points last week. Ten analysts polled by Reuters had expected corn ratings to fall 3 points and soybeans 2 points.

USDA said 24 per cent of the corn crop was in good-to-excellent condition as of Sunday, down from 26 per cent the previous week, while 29 per cent of the soybean crop was in that category, down from 31 per cent the previous week. Those ratings are the worst condition for those crops since the last major drought in 1988.

The analysts polled by Reuters were expecting 23 per cent of the corn crop to be in good-to-excellent condition and 29 per cent of the soybeans in the same category.

The soybean crops in the top two grain states, Iowa and Illinois, fell 2 and 4 percentage points, respectively. But rains last week in the northern and eastern reaches of the Midwest improved ratings in Michigan and Kentucky.

Temperatures this week were forecast in the mid-90s to low 100s degrees Fahrenheit over one-third of the southwestern Midwest, which would include Missouri, Illinois, Iowa, Kansas and Nebraska. Next week, temperatures of 95 to 105 degrees F were forecast for over half of the southwest Midwest.

Additional soybean losses "This will contribute to additional soybean losses," Commodity Weather Group said on Monday morning. Soybean futures at the Chicago Board of Trade, which slipped marginally last week on profit-taking after hitting a record high $17.77-3/4 per bushel on July 20, rose sharply on Monday and were tracking their biggest monthly gain in percentage terms since October 2006.

"Soybeans are shrinking before our eyes," said grains analyst Rich Feltes of RJ O’Brien in Chicago. "Rains over the weekend were less than expected and there are forecasts for dry weather during the three most critical weeks for soybeans."

The drought has fired up grains markets over the past six weeks, lifting corn and soybean prices to record highs. Wheat has rallied to the highest level in four years, aided by concerns over dry weather in southern Europe.

New-crop December corn futures have rallied 49 per cent over the past six weeks, while November soybeans have gained 20 per cent. Benchmark September wheat has surged 40 per cent but remain under the 2008 high above $13 per bushel.

Livestock and poultry producers, hit hard by the surge, petitioned the federal Environmental Protection Agency on Monday to waive a 2007 mandate that essentially requires more than a third of the U.S. corn crop be converted into ethanol.

On Monday, Chicago Board of Trade new-crop December corn rose 2.6 per cent to end at $8.14 a bushel after touching a contract high of $8.17-1/4. November soybeans rose 2.6 per cent to $16.43-1/2 a bushel. September wheat gained 1.8 per cent to $9.14-1/2 a bushel.

World Bank Group President Jim Yong Kim said in a statement on Monday the bank was ready to help governments deal with the surge in grain prices, adding that "we cannot allow short-term food-price spikes to have damaging long-term consequences for the world’s most poor and vulnerable."

Black Sea concerns

While the wheat market has been largely driven by the grains rally, there has also been support from growing concerns over supplies from the Black Sea region and South America.

There has been persistent talk of Russia curbing exports due to poor yields despite government denials. Russia’s wheat exports in July were lagging the year-ago pace at 975,000 tonnes compared with 1.30 million.

The concerns are based on precedence, with Russia banning grain exports in 2010 after a severe drought devastated crops and rallied U.S. wheat prices to an all-time high above $13 a bushel.

Barclays Bank said it was expecting the USDA to reduce its wheat crop estimates for Black Sea exporters Russia, Kazakhstan and Ukraine due to weather damage in their crops.

Additional reporting by Ivana Sekularac in Amsterdam, Naveen Thukral in Singapore, Valerie Parent and Gus Trompiz in Paris and Veronica Brown in London; editing by David Gregorio, Alden Bentley, Jim Marshall, and Bob Burgdorfer