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.

An underdeveloped ear of corn lays amongst corn plants damaged by extreme heat and drought conditions in a field in Carmi, Illinois.
Daniel Acker | Bloomberg | Getty Images
An underdeveloped ear of corn lays amongst corn plants damaged by extreme heat and drought conditions in a field in Carmi, Illinois.

“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.

Damage spreads

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.

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.
Getty Images
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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