Drought 2012: Harsh Reality of Higher Food Prices

Droughts tend to produce vast yield variations. This week's ProFramer crop tour reaffirmed this tendency and as UBS notes, conditions declined with the expectations of low yields compounded by the harsher reality of poor quality - likely to be a major issue for corn feeders. 

Interestingly, Soybeans looked good from the road but up close (pod formation and beans/pod) were well below normal; and UBS adds to forget the CME for the moment - the cash market is now the attention grabber as they expect it to lead this rally in Ags higher - especially the July 2013s, raising an interesting question of if (or when) the US will restrict exports? Especially with no let-up in the drought conditions.

Lower yields AND lower quality...

With Corn and Soybean conditions data just awful...

and its not getting better anytime soon...

Drought 2012: Hot Weather and Hot Grain Markets

It's only August, but talk early harvest of corn and beans is under way. Louisiana is 11 percent harvested on the beans, Mississippi is 6 percent done.

USDA issued the first harvest report, saying that we were 4 percent done Sunday night.

The early harvest might be contributing to the old-crop/new crop spreads. Early in the rally, the nearby contracts led the markets. Recently, it has been the December corn contract.

With early harvest taking the pressure off the idea of running out of corn, we can now just worry about the new crop. At some point we will wonder if the carryout is still too high because we used some of the current crop up before the current crop year officially started.

The highs in corn prices have has a lot to do with ideas of limiting demand. Not much talked about by farmers, but noticed by the trade is the unusual importing of corn taking place right now.

Southeastern feeders have banded together to get Brazilian corn into Norfolk. Nine cargoes were booked more than a month ago. This month, the talk was of Brazilian corn coming into California for the dairy industry concentrated there, away from our mainstream supply.

It's sad to think that ocean freight from Brazil can be cheaper than rail freight from the Midwest.

The government has stopped just posturing about the ethanol mandate. The EPA has now officially opened a 30-day period for comment on whether the mandate should be waived. This would mean that refiners would not be required to put 10 percent ethanol in their gasoline blends. The consensus is that if the mandate is suspended, corn prices would drop as usage in gas would drop. 

If the mandate changes and the refiners go to less ethanol, the result would be the total stop to the rally and a retracement, looking for a demand-driven price.

Some time in the future we will look at the charts and have reasons why prices changed at a certain date. What we know is that the prices cannot just go up.

Drought 2012: Food Prices to Surge Higher - USDA

The drought of 2012 has sent corn, wheat and other commodity prices soaring to record or near record levels in recent weeks as U.S. crops continue to dry out.

The record drought gripping half the US will help push food prices up by 3% to 4% next year, according to the Department of Agriculture.

"In 2013 as a result of this drought we are looking at above-normal food price inflation. Consumers are certainly going to feel it," USDA economist Richard Volpe said.

Milk, eggs, beef, poultry and pork prices will all be affected by the drought, which has pushed up prices for feed.

• Beef prices are expected to see the biggest jump at 5% to 7%.
• Dairy product prices are forecast to climb 5% to 6%.
• Poultry and egg prices are projected to rise 4% to 5%.
• Pork prices are expected to rise 4% to 5%.

With farmers and others warning that prices will rise, the drought has sent corn, soybean and other commodity prices soaring in recent weeks as fields wither under the heat across much of the Midwest.

The drought is not expected to affect prices for fruits and vegetables as most of those crops are irrigated. However, the USDA is forecasting a 2% to 3% for all fruits and vegetables in 2013.

Drought 2012: Global Impact of Wilting U.S. Crops - Video

 

At least 32 states are feeling the effects of the drought as the unrelenting heat has pushed grain prices to record levels.

Corn is the major U.S. crop and a bad year drives the price up on everything from beef to cereal to fuel. As crops continue to wilt, farmers and consumers around the world are looking towards the sky, hoping for rain.

Drought 2012: Food Shortages and Global Unrest Possible

Worst Drought Since Dust Bowl

With more than half the US in the grips of the worst drought since the 1934 Dust Bowl, shortages and rising global prices which on corn, wheat and soybeans, which America is the world’s largest exporter, could lead to global unrest.

World prices for corn, wheat and soybeans have already reached record levels, and will continue to affect developing countries that rely on on agricultural imports for food.

“The drought is clearly going to kick prices up. It already has,” said NECSI president Yaneer Bar-Yam. “We’ve created an unstable system. Globally, we are very vulnerable.”

Deregulation has not help the situation. In the late 1990s, food markets were deregulated, allowing hedge funds and investments banks to speculate on prices, making markets susceptible to sudden, sometimes massive, price fluctuations.

“The drought may trigger the third massive price spike to occur earlier than otherwise expected, beginning immediately,” wrote the NECSI team. Price hikes have been credited as the cause of the Yemeni uprising in 2008 that led to food riots and widespread violence. During that same year, killings occurred in Haiti over the doubling of the price of rice, resulting in government rice warehouses being looted.

The 1934 drought and dust storms millions of acres of crops and left 80% of America experiencing food shortages. At a time when much of the world relies on the US for food staples like corn, wheat and soybean, the impact of the 2012 drought could lead to increased global hunger and violence.

Drought 2012: Biggest Natural Disaster in US History

No Relief for America's Heartland

More than half of America is in areas designated natural disaster sites by the USDA have been ravaged by a dry spell destroying crops in nearly 1,600 counties in 32 states.

Among those effected by damage, reports Bloomberg News, are approximately 1/3 of the nation’s farmers, which contributes in making this declaration the largest ever of its kind by the Department of Agriculture.

“Agriculture remains a bright spot in our nation’s economy,” Agriculture Secretary Tom Vilsack tells the country this week in an official statement. “We need to be cognizant of the fact that drought and weather conditions have severely impacted farmers around the country.”

The heartland of America's agriculture community, the Midwest, is suffering from moderate to extreme drought.

“Farmers and ranchers are at the mercy of Mother Nature,” Kansas Governor Sam Brownback says in a statement. Brownback’s state produced $8.2 billion in crops in 2010, but with historic dry weather whithering crops this year, Kansas expects a monumental drop.

Corn, the largest cash crop in the US, has been the hardest hit by the drought with only 35% of corn supply in good to excellent condition as of this past weekend, down from 48% percent only a few weeks ago. Soybean crops, America’s other top agriculture product, has also been largely destroyed.

Drought 2012: Nearly 1,600 Counties Declared Disaster Areas

218 Counties Added in 32 States

As one of the worst droughts in U.S. history continues, an additional 218 counties have been added to the US government’s list of natural disaster areas bring the total to 1,584 counties in 32 states that have been designated primary disaster areas, according to the USDA.

The USDA utilizes a weekly drought monitor to form its list and this week they found that nearly half of the nation’s corn crop and 37% of its soybean crop was rated “poor” or “very poor.”

Farmers and ranchers in counties considered natural disaster areas are eligible for federal aid, including low-interest emergency loans, in addition to access to 3.8 million acres of conservation land to feed their animals. Three quarters of the country’s cattle are in areas affected by the drought.

Farmers are being paid to take land out of production to prevent erosion and create wildlife habitat and are also receiving a penalty-free, 30-day grace period on their crop insurance premiums this year.

With confidence in the economy at its lowest level since the recession combined with US export orders at there lowest level in three years, food shortages and rising food prices could drive the country into another recession with impact felt worldwide.