Massive US Drought Leads to Worst Fears for Corn Crop

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Corn struggle to survive in a drought-stricken farm field on July 16, 2012 near Uniontown, Kentucky. The corn and soybean belt in the middle of the nation is experiencing one of the worst droughts in more than five decades.

Concerns are growing that if the situation worsens, shortages could lead to export bans by some countries. The head of the United Nations Food and Agriculture Organization has called on the U.S. to suspend temporarily its quota for ethanol used in gasoline to relieve pressure on corn demand.

“The world balance sheet still has a little more downside protection in terms of ending stocks,” said Shawn McCambridge of Jefferies Bache.

He noted the USDA reduced its forecast for wheat production in the Baltic area.

The hit to the U.S. crop will clearly ripple across the world.

“It presents challenges,” he said. “I wouldn’t say it’s at crisis levels. No. But I would say it presents challenges we haven’t had to deal with in a number of years.”

He said one key will be whether there are further downgrades in the U.S. corn and soybean crops.

So far the U.S. has not contributed to the strain on the global wheat crop. “We’ll start to plant the winter wheat crop pretty soon,” said McCambridge. “Conditions are still pretty severe to extreme, across much of the winter wheat production area. That will become the next concern and focus for the market as we go forward.”

The U.S. livestock industry could potentially be even more impacted that grain growers longer term. Hog farmers had added to their herds when farmers were taking advantage of a wet, early spring to plant a record number of acres this year. Corn at the time was expected to be cheap and plentiful. But in just a few short months, the forecast reversed to the worst possible scenario and hog farmers have been reducing herds as feed prices rise. That reduction initially drives meat prices lower but ultimately results in higher prices due to smaller herds.

Cattle is also being impacted but more by the fact that pasture land was also scorched in the drought.

“For cattle, we will see a 4-percent decline in beef production in 2013. There will be some issues we will have to deal with. There’s a 3-year lag between production expansion and when it hits,” said Nelson.

Because of the amount of time it takes to breed and raise cattle, the price squeeze for beef could last longer than for poultry or pork.

“You can expect tight supplies and high prices for the next three years,” Nelson said.

McCambridge said livestock farmers are bringing animals to market at below normal market weight, to reduce their feed costs.

“The livestock producers are looking at their margins drift away,” he said.

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