How will you be impacted by the drought?

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“Although the drought is far from over and its final toll on U.S. agriculture is still uncertain, the 2012 drought will undoubtedly be etched into farmers’ memories for years to come.”  That is the prognosis of the Federal Reserve Bank of Kansas City, and it is very true.

 

I remember the drought of1956 when Dad put a dollar bill and some coins on the kitchen table and said that was all the money we had because of the drought had burned up the corn. Young farmers and veteran farmers alike will remember the 2012 drought, and each for a different reason. The impact will be widespread across the U.S. economy.

 

The Kansas City Fed’s drought impact analysis by Jason Henderson and Nathan Kauffman identifies many sectors of the agricultural and U.S. economies that will be either touched or slugged by the drought. They say if historical patterns hold, U.S. consumers can expect to pay higher food prices over the next year.

 

What is the impact on crop production?
One of the most promising harvests in history has been ruined because of the loss of record acreage and an expected return of good yields. Since USDA’s cut of its projections in July, growing conditions have deteriorated further, with more yield reductions and acreage abandonment expected in coming weeks.

 

How high have crop prices risen?
With grain stocks at historic lows, declining crop production spurred a sharp rise in prices since the first of June, with a 40% gain in corn, 30% in soybeans, and higher wheat prices as the market anticipates its need for feed. However, prices have not matched the 50% rise seen in 1988, but could go higher than they currently are.

 

What are implications for crop revenue?
Crop prices will offset yield losses, and by the end of July, prices had risen faster than yields had declined. Compared to revenue estimates in June, corn revenue may be 12% higher and soybeans 3% higher. That was similar to 1988, but final revenue estimates depend on production and price response to harvest.

 

Will crop insurance offset the losses?
With shrinking yields, crop insurance will be a vital revenue source for many farmers, potentially boosting their gross revenue. But significant losses could emerge for farmers without crop insurance or those with over-hedged positions.

 

What is the impact on ranching?
They are heavily burdened by the drought because of stressed pasture and rising hay costs.  Over 70% of all beef cows are in states with pasture conditions rated poor to very poor. Two thirds had production areas that are affected by the drought. Calves have been weaned earlier than usual and sent to feedlots. 

 

What are implications on cattle feeding?
Despite lower prices for feeder cattle, feedlots face losses from high feed costs due to the 25% surge in prices for corn, bean meal, and DDGS since spring. Fed cattle prices have declined 15% as seasonal prices have begun their decline. USDA forecasts a $200 loss per head on feedlot operations.

 

What are the effects on dairies?
Heat stress has lowered milk production, with smaller supplies boosting milk futures; however, feed prices have risen higher and faster. Consequently, dairy operations have struggled with profitability and the liquidation of some herds has exacerbated declining beef prices.

 

What are the effects on hog and poultry operations?
Both are bracing for higher feed costs and lower profits from marketing, due to more head coming to the market resulting from liquidations. Hogs are going to market earlier than normal and profitability has been cut for poultry operations due to higher feed costs.

 

How high will food prices rise?
The current drought will cause a 4% rise in annual retail food prices. First, meat prices will rise, then cereal and bakery products. A second wave of higher food prices will emerge from the rising meat prices. A year after the drought as meat supplies disappear, smaller breeding herds are noted with fewer slaughter animals. Livestock prices rose 8% in 1989.

 

What are the implications for inflation?
Rising food prices will contribute to inflation, since food makes up 14% of the consumer price index. The economists say that will result in a 0.6% contribution to overall inflation. Rising food prices will impact consumer spending in poorer households which will shift consumption to less expensive foods, and consumers will also reduce their patronage of restaurants, as well as shift to lesser expensive restaurants.

 

How have corn prices affected the ethanol industry?
Refineries are struggling with profitability due to higher corn prices, which is 90% of the variable cost of an ethanol plant. That has resulted in production cutbacks, layoffs, and some plant shutdowns. July production was 13% below first quarter production levels.

 

What is the implication for renewable energy policy?
High corn prices and low stocks have caused speculation that changes may come to the Renewable Fuel Standard, with a temporary waiver of blending requirements. The current mandated use is 13.2 billion gallons, and a reduction would reduce corn demand and lower corn prices.

 

What is the impact on the grain handling and processing industries?
These industries will face leaner profits as fewer bushels will be handled, transported, and processed, despite higher costs being passed on to consumers. Additionally, low water levels in the Mississippi River could increase transportation costs for the 60% of U.S. grain that is shipped on the river for export.

 

What are effects on meat packers?
Beef packer margins have shrunk 90% in the past month due to high temperatures reducing demand for meat during the prime grilling season. Boxed beef prices have fallen 10%, and pork demand has been weak domestically, but still in demand by the Chinese export trade. Pork cutout values have fallen 10% and packer margins have been negative, even with the lower price of hogs.

 

How long will crop prices remain high?
The Kansas City Fed economists say, “Most of the burden of the drought has come through higher crop prices. High crop price will persist as long as crop inventories remain historically low. Prior to the drought, crop prices were sliding lower as bumper crops were expected to lift grain stocks-to-use ratios from record lows. Now, grain inventories are projected to remain near historical lows following the fall harvest and underpin record high prices.” They add that demand will be reduced, particularly with livestock liquidation and reduced export demand.  The higher U.S. prices will result in more global production.

 

Summary:
The shortfall in crop production will be felt by the food processing industry and eventually by the consumer. End users, whether ethanol refineries or livestock operations will see higher prices of grain and grain products, with subsequent reduction in output. After prices ration the demand and peak, price declines will reflect reduced demand. Inflation will see a minor impact from higher food prices, but some consumers will change eating habits.

Source: FarmGate blog


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