Focus on Ag

5 Lessons Learned from the 2012 Drought

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The 2012 crop year and the major drought that affected much of the United States is now behind us; however, many areas of the western Corn Belt, including much of southern and western Minnesota continue to face drought concerns for the coming 2013 crop year. Anytime we have a major disaster, such as the 2012 drought, it is always good to review what happened or didn’t happen, and to use those findings to strategize for the future. Following are some key observations relative to the 2012 drought that can help farm operators and the agriculture industry plan for the coming years.

 

1. Genetic advancements in seed technology. Based on most analogies, the 2012 drought in the major corn and soybean producing areas of the U.S. was more severe than the drought of 1988. USDA recently estimated the 2012 national average corn yield at 123.4 bu./acre, which is the lowest national average yield since 1995. Interestingly, the average U.S. corn yield in 1988 was only 84 bu. This shows not only the ongoing yield improvement that has been made for the past few decades in the corn hybrids that are available today, but also the genetic improvement that has been made to help corn be more tolerant of drought and other stresses during the growing season. Seed companies and land grant universities are working on genetics to make corn hybrids and other seed varieties even more drought tolerant in the future.

2. The impact of modern farming practices. If the drought conditions in 2012 were the most severe since the 1930s, why did we not see the “dust bowl”-like conditions that existed in that era? The main reasons are the efforts in the U.S. to protect our natural resources, and the fact that the farming practices of today are far superior to previous generations in preventing soil erosion. Federal programs such as the Conservation Reserve Program (CRP), wetlands restoration programs and grassland protection programs have helped keep some of the most fragile land out of production. Crop farming practices used by today’s producers have also greatly enhanced the protection of our soil, which along with water, are the most important natural resource for top-quality crop production. There are many more farmers using no-till or minimum tillage methods to produce their crops today – compared to a few decades ago – and farm operators have installed more conservation practices, such as filter strips and waterways to control erosion.

3. The importance of Federal Crop Insurance. In States like Iowa, Illinois and Indiana, which were among the hardest hit by the 2012 drought, the availability of revenue-type crop insurance products will help ease the financial impact of this year’s drought. Today, the revenue insurance products are based on both yield and price and are used quite frequently. Well over 80% of U.S. corn producers carried some type of crop insurance in 2012, compared to only 15% of the nation’s corn producers in 1988. Crop insurance proceeds do not create a windfall for farm operators, as some critics have stated, and insurance indemnity payments rarely match the income that could be achieved with a normal crop production. However, crop insurance payments do help producers cover expenses in a crop year with greatly reduced production, and give them the ability to access adequate credit needs to purchase crop inputs for the following year. Farm operators need to consult their crop insurance agent well ahead of the March 15 deadline to determine their best crop insurance strategies for 2013.

4. The need for a risk management program for livestock producers. The biggest financial impact of the 2012 drought was on livestock producers. Corn costs rose nearly 50% and soybean meal costs were up about 35% during a six to eight week period this past summer. And costs have remained fairly high. The estimated cost of production for pork producers in the last half of 2012 rose to over $72/cwt., and has dropped only slightly in the past couple of months. Pork producers lost an average about $20-40/hog marketed during late summer and early fall 2012, and even now profit margins for most producers remains negative. Similarly, the sharply higher feed costs have resulted in large financial losses for the fed cattle and dairy industries in recent months. The higher feed costs, along with limited hay supplies and poor pasture conditions, led to liquidations of beef and dairy cow herds and reductions in sow numbers, which put even more short-term impact on livestock prices and reduced profitability for producers. The situation for livestock producers, which was created as a result of the 2012 drought, has once again pointed out the need for a risk-management program for livestock producers that provides the same type of safety net that crop producers have available through crop insurance.

5. Difficult decisions in grain marketing.

Grain prices rose to record high prices this past summer, reaching harvest prices near $8/bu. for corn and over $17 for soybeans in southern Minnesota. As of mid-January, current local cash grain prices have moderated to around $7.25 for corn and $14.30 for soybeans, which are still very good price levels. Harvest grain prices for fall 2013 are near $5.40/bu. for corn and $12.20/bu. for soybeans in south-central Minnesota.

Many farm operators did not market a lot of their corn and soybeans at the top price levels, as they started marketing their grain last spring and early summer – before the major drought occurred – as a risk management approach. A lot of corn in the region was forward priced at $4.75-5.50/bu. in May and June, and the soybeans at $12-13/bu., which seemed like good prices at the time. Once the drought set in, producers needed to be cautious how much more grain they forward contracted – in case they did not get the bushels – so they ended up missing the top of the market. However, for most corn and soybean producers in Minnesota the strong grain prices resulted in a very profitable year for crop production in 2012. It appears that the 2013 crop year will be another year of high grain price volatility, which will again create some very difficult grain marketing decisions.

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