Massive US Drought Leads to Worst Fears for Corn Crop
The worst fears for the U.S. corn crop are being realized, as the government now expects the lowest yield in 17 years and a total crop about a third smaller than what was projected at the start of the growing season.
“The massive crop problems that everyone has been estimating and fearing have come true,” said Randy Mittelstaedt, director of research at R.J. O’Brien.
With corn prices at a record, the shrinking crop has significant implications for global food supply and consumers, as the livestock industry, food processors and ethanol producers respond to less supply at higher prices. New crop (December) corn futures hit a high of $8.34 per bushel overnight, and corn has increased nearly 50 percent since the beginning of June. On Friday, corn was trading off its highs in late morning, and soybean prices were up about 1.5 percent.
“We had our second worst drought in almost 30 years this year. The market’s reacted and the market will be able to recover and get back to normal pricing but not until the middle of next year,” said Rich Nelson, director of research at Allendale. “For the general consumers, (it means) higher meat prices, higher dairy and higher egg prices.”
The U.S. Department of Agriculture Friday dramatically slashed its forecast for corn productionto a total of 10.779 billion bushels of corn, which is worse than some traders expected and down from its last forecast of 12.97 billion bushels. Its original early spring forecast was for a bumper 14.8 billion bushels, planted with optimism this year, earlier than normal and on a record number of acres.
The USDA’s forecasts that the crop will now yield just 123.4 bushels per acre, well below its last reduced forecast of 146 bushels and a 17-year low.
The government also pared back its projection for ending inventories for the 2012/2013 crop year to 650 million bushels, a stunning 533 million bushel decline. Citigroup analysts say this is the tightest ending inventories level since the 1995/1996 crop, and it is well below the historic 900 million bushels level.
The drought hit 62.5 percent of the country and struck the Midwest corn belt at the worst possible time in the growing season. The industry had warned that the lack of rain and extreme heat during the “tasseling” season, when corn kernels form, would result in a sharply reduced crop, but the USDA report, released Friday, include the first results of actual field checks by the federal agency.
The USDA also cut the outlook for soybean production to 2.692 billion bushels, down from its July forecast of 3.05 billion, the smallest in nine years. Nelson said the drop in yield was slightly more than expected, though the soybean crop still has a chance for some recovery since it was not in the critical phase corn was in when the worst of the drought hit it. The USDA, meanwhile, raised its forecast for the wheat crop.
Nelson said the soybean report looked neutral, but he pointed out one interesting aspect. He said the USDA shaved its estimate for Chinese soybean imports to 59.5 million tons from 61 million tons.
“But China’s been buying soybeans all week. They bought 290,000 tons over night,” he said.
China is a major global buyer of soybeans, used to feed its massive pig herd.
While there are many industry forecasts for corn at $9 a bushel and above, Nelson said the drop in demand could temper the price rise. The USDA adjusted its demand forecast, as well.
“We’re dropping corn production by 2.191 billion bushels. They offset that with drops in old crop demand and new crop demand. The total offset was actually 73 percent of the production decline. They have declines coming out of all sectors here,” he said.
The biggest reduction in the demand forecast was for livestock feed, from 4.8 billion bushels to 4.075 billion. Demand by the ethanol industry, the biggest user of U.S. corn, was forecast to drop from a previous estimated 4.9 billion bushels to 4.5 billion, and exports were seen dropping to 1.3 billion bushels from 1.6 billion, he said.
The damage to the U.S. crops comes as nature wreaks havoc on other areas of the world. Hot weather in Russia and the former Soviet Union is affecting global wheat prices, and rain in Brazil is damaging sugar.