Focus on Ag

Impacts of the 2012 Drought

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Much of the major corn- and soybean-producing areas of the U.S. are now in the middle of one of the worst droughts in decades, certainly the worst since 1988, and possibly since the 1930s. As of July 30, 37% of the U.S. Corn Belt was considered to be in an “extreme” or “exceptional” drought status. States like Iowa, Illinois, Indiana, Missouri, Nebraska and Wisconsin are all feeling the brutal brunt of this drought. While Minnesota crops have fared somewhat better during 2012, portions of southwest, south-central and northwest Minnesota will also likely have a some impact from the drought.

The corn and soybean market prices have responded to the U.S. drought with dramatic market increases. Chicago Board of Trade (CBOT) December corn futures prices rose to over $8/bu. by late July – an increase of nearly $3 since mid-June, or about 60%. Similarly, the new-crop November soybean futures reached over $16.50/bu. by late July –an increase of more than $3.75 since mid-May.

While the higher corn and soybean prices may offer some potential benefits to grain producers to offset lower yields from drought conditions, the higher prices can also present some challenges. If producers forward contract more grain than they are able to produce, they may be forced to buy the contracted grain at higher prices at harvest time to fill those contracts, which could actually end up costing them extra money. In some areas of the Corn Belt, being able to find adequate bushels to fill the grain contracts could be a problem. Farm operators with Revenue Protection (RP) crop insurance do have some protection when forward contracting up to the insurance guarantee, due to the fact that the insurance guarantee increases as CBOT harvest futures prices rise.

The biggest financial impact of the drought will hit livestock producers. Most crop producers have protection from the RP crop insurance policies, many with coverage levels at 75-85% of revenue guarantees, which along with the higher crop prices, will help reduce the financial impact of the drought. Livestock producers are not able to similarly offset the higher feed costs that result from a drought. As mentioned earlier, by late-July future corn costs were up nearly 60% and soybean meal costs were up about 35% from two months earlier.

Livestock producers in all parts of the U.S. will likely feel some financial impact from the 2012 drought. The estimated cost of production for pork producers is expected to rise sharply in the third and fourth quarters of 2012. Based on hog futures prices in late July, many experts are now projecting a loss of about $20-30/hog marketed in the next six to nine months. Similarly, the expected sharply higher feed costs are expected to result in large financial losses for the fed cattle and dairy industries in the coming months, as well.

The higher feed cost – along with limited hay supplies and poor pasture conditions – is already leading to large liquidations of beef and dairy cow herds, and reductions in sow numbers. This will put even more short-term impact on livestock prices, and further reduce profitability for livestock producers later this year. However, by the end of 2013, the reduced livestock numbers will likely mean less supply of pork, beef and milk available, which will likely return most livestock production back to more profitable levels. The extra short-term supply of pork and beef may lead to some lower retail meat prices in the coming months; however, ultimately meat and milk prices at the consumer level will likely increase in 2013 due to lower supplies, as a result of the 2012 drought.

 

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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