Further, there will be a definite
impact to U.S. GDP, which could add to pressures (excuses?) that the Fed
may use to justify additional quantitative easing (QE) measures
(otherwise known as 'printing more money').
Here's an in-depth look at why the U.S. Drought of 2012 is far from over...
Bigger Than Expected Crop Losses
Certainly the number one story around the U.S. drought centers on its
impact on grain production, specifically corn and soybeans. In a
minute we'll discuss the other impacts, but we'll start with the one
that has the greatest potential to cause both suffering and strife over
the coming months (and possibly years), especially for those on
In 2011, the U.S. reaped a corn harvest of some 314 million tons. In
2012, the USDA has estimated a harvest of 274 million tons - a
shortfall of 40 million tons - despite record acreage being planted.
While the USDA has been steadily reducing their crop estimates,
practically with every passing week, it seems likely that the USDA
remains behind the curve today, as it has been every step of the way. A
different source for information comes from the Pro Farmer Midwest
Crops Tour, which is coming in slightly under the current USDA
Crop Tour Points to Sharper Drought Impact on Soy, Corn
Aug 21, 2012
Initial reports from the closely watched Pro Farmer Midwest Crop Tour suggested more crop damage than expected from the drought
, raising the potential for diminished soybean production this fall and sending futures sharply higher.
The disappointing crop reports from scouts touring fields on the Pro
Farmer crop tour in states such as Ohio and South Dakota make it hard to believe soybean yields will reach current U.S. government crop projections
, said Don Roose, president of advisory and brokerage firm U.S. Commodities in West Des Moines, Iowa.
The market is in the "watch and worry" mode on all fronts as shrinking crop forecasts will further tighten supplies already projected to dwindle to precariously tight levels in 2013
, Mr. Roose said.
On the annual Pro Farmer tour, analysts and investors walk
corn and soybean fields in seven Midwestern states over four days to
assess prospects prior to the fall harvest
. Pro Farmer is an
agricultural advisory firm. The Pro Farmer tour, which wraps up
Thursday, reported diminished potential for the soybean crop in both
Ohio and South Dakota.
The crop tour doesn't estimate soybean yields, but it reported an average 584.9 pods per 3-foot-by-3-foot square area in South Dakota, down 47%
from a year ago. In Ohio, scouts reported soybean counts at an average
of 1,033.72 pods per 3-foot-by-3-foot square area, down from 1,253.2
pods a year ago.
Soybeans entered their critical growing phases in recent weeks, and the crop has benefited in some regions from recent rains across the eastern Farm Belt
Meanwhile, scouts with the Pro Farmer Midwest Crop Tour on Monday reported an average estimated corn yield in Ohio of 110.5 bushels per acre
, down from the tour's estimate of 156.3 bushels a year ago
. In South Dakota, tour scouts reported an average yield estimate of just 74.3 bushels per acre, down from 141.1 bushels a year ago.
While commodities traders and agronomists have braced for weeks for the prospect of a crop decimated by drought, the estimates were lower than many had expected.
The summary here is that the Pro Farmer Tour is reporting crop yields
to be 2% - 3% lower than current USDA forecasts, which is a big deal
when it comes to food. We're talking a few tens-of-millions-of-bushels'
The somewhat sour note in this unfolding drama is the fact that 40%
of the nation's corn crop goes to ethanol producers, which means that
food will be burned in the nation's auto fleet instead of helping to
keep prices down for consumers and animal feed. Another 40% goes to
animal feed (chicken, cattle, hogs, etc.), and the remaining balance
goes to direct human consumption.
However, the ethanol mandate is a congressional requirement for our
fuel blenders, so they do not have a choice in the matter. It would
literally take an act of Congress to even temporarily suspend the
ethanol requirement - and in an election year, that's just not going to
happen, given the powerful constituencies invested in preserving that
Of course, higher input costs will ripple through the entire chain,
so perhaps Bernanke will get the inflation he seeks, although it won't
be the one he wants. The inflation he wants is simple monetary-driven
inflation. The inflation he will get is nothing more than a
Still, the USDA has a handy calculation for estimating the future impacts:
U.S.'s inferior corn crop has supply-chain ramifications
Aug 13. 2012
The USDA has provided considerable information about how the drought's effects were likely to percolate through the economy
. Because of a smaller-than-expected corn crop, the USDA said it can make the general prediction that "we will see impacts within two months for beef, pork, poultry and dairy (especially fluid milk)
. The full effects of the increase in corn prices for packaged and processed foods (cereal, corn flour, etc.) will likely take 10-12 months to move through to retail food prices."
The USDA has a formula for predicting changes in the rate of inflation caused by gains in prices at the commodity level: if the farm price of corn rises 50%, retail food prices rise by 0.5% to 1%
as measured by the Consumer Price Index (CPI).
The price of September corn futures from mid-June until early August
advanced 55%, meeting the USDA's criterion for a measurable increase in
the CPI Lapp presented a more extreme scenario than the USDA. He
predicted that the damage to the 2012 corn crop will translate into a food inflation rate of 4% to 5% in 2013
. In his view, the dollar cost of the drought already was $30 billion, which accrued rapidly over the summer.
"This is a cost that somebody has to bear," Lapp said. "Some price hikes are fairly quick and others take a while."
He said high feed costs will have to be absorbed by producers, who
will likely liquidate part of their cattle and swine herds and poultry
populations. At the retail level, the drought's effects will
translate into narrower margins - and expected higher prices - for
processed food and soft drink manufacturers
Lapp offered his opinion that legislation that has effectively required 40% of the corn crop be used in making biofuels has made everything worse.
"The situation has been aided and abetted in a negative way by the biofuels mandates," he said. "Shame on us for having mandated so much to corn ethanol" without creating contingencies for a bad crop year.
Because corn is the base unit for so many things (especially in the
form of high-fructose corn sweetener), and because it's a primary feed
component for finishing cattle and raising chickens and hogs, it tends
to have a pretty decent impact on food prices.
However, it takes time for those price hikes to work through the
system. So it will not be until 2013 sometime that we really begin to
feel it in the U.S. And for the rest of the world that lives more
directly on grains? They're not as lucky. The price hikes hit them
It looks like the harvest in Russia will be below expectations as well:
Russia harvest forecasts cut as drought hits crop in east
Aug 20, 2012
(Reuters) - Two leading Russian agricultural analysts cut their
forecasts for Russia's grain harvest on Monday after harvest data from
two drought-stricken eastern growing regions reduced the outlook for
the overall crop.
SovEcon narrowed their grain forecast to 71-72.5 million metric tonnes (...)
The government's official grain harvest forecast is 75-80 million tonnes, of which 45 million tonnes could be wheat. The government has put this season's exportable surplus at 10-12 million tonnes
, a level seen by traders as an informal cap on exports.
The government has tried to reassure markets there will be no
repeat of August 2010, when Russia's government shocked markets with a
snap decision to ban grain exports
when the scale of losses from major drought became clear.
The government has indicated that protective tariffs could be an option, though only after the end of the calendar year.
But traders widely expect limits to be imposed in some form, perhaps as early as November,
after heavy exports in the early months of the season
showedRussiacould hit the 10-12 million tonne mark sooner than January.
Russia is still officially projecting 75-80 million tonnes but may
only get 71 tonnes. If the projected exportable surplus is 10-12
million tonnes, but Russia actually harvests 9 million tonnes less than
their hoped-for projection, then its exports will have to decrease to
plug that gap.
Here's the kicker: Russia has already exported a good deal of that
amount. That is, the prospect of another Russian export ban this year
is quite realistic. If we get one, then we can expect a repeat of the
turmoil in the grain markets that we saw in 2010.
But there's another much more fundamental reason why we can expect higher prices going forward.
Need for Even Higher Prices
The good news is that there's still plenty of supply to carry us
through to the next harvest. However, demand is going to have to go
down some, and the way we accomplish that is through the price
Right now, physical grain traders are saying that prices are too low
and that unless they rise, we're going to run out of grain before the
next harvest. Obviously, that's not truly going to happen - increasing
scarcity will cause prices to rise until current demand levels are
Fall in corn price disguises real picture
Aug 20, 2012
Corn prices surged this monthto an all-time high of $8.4375 a bushel
on the back of the worst drought in the US in nearly half a century.
But prices have since fallen roughly 5 per cent. The impression is the rally has run out of steam.
This is far from the real picture. Prices need to rise again -
probably setting all-time highs - to dampen consumption that is
running ahead of supply.
If demand does not slow down, silos will be all but empty before the next harvest arrives in late 2013.
On paper, the balance sheet for corn supply and demand published by
the US Department of Agriculture seems good enough. But in practice,
the numbers look a bit shaky. The agency, whose figures are closely
watched by the market, first estimates supply and, after that, adjusts the demand data to maintain a minimum level of inventories
This time the USDA is asking for monumental rationing on the demand side.
For example, US corn feed and export demand will need to drop to their lowest levels in nearly 20 years.
The USDA is also forecastinglower ethanol production- and thus corn
demand. Ethanol output has fallen, but not nearly enough. Worse, therise
in wholesale petrol pricesback above $3 a gallon means that ethanol
producers are profitable again, even when paying record corn prices.
Corn is now trading just above $8 a bushel - but traders in the physical market say that prices need to rise to $9-$10 to force demand down enough
to meet the consumption levels anticipated by the USDA.
The retreat in corn prices over the past couple of weeks has given inflation watchers a false sense of security. The market should not relax, however
. More food inflation is just waiting around the corner.
The idea here is that the cash market will have to lead the futures
market higher, an odd situation because it is usually the other way
around. With so many hedge funds now playing in the commodity space,
one explanation is that they are simply playing paper games with each
other - those playing the short side will get a lesson in the
importance of keeping one eye on reality.
A truly shocking event would be if the U.S. ever gets to the position
of limiting exports of corn or even soybeans. That is a very unlikely
proposition to consider, but if the silos get drained because we have
dysfunctional markets that saw fit to keep prices bizarrely low while
our free trade agreements allow the too-low grains to be exported,
threatening domestic supplies, then that possibility notches up a
Dairy, Meat, and Even Higher Gasoline Costs
While it is clear that basic grain prices are heading higher, the
knock-on effects into other soft commodities are a little less clear,
but are definitely still important to consider.
The most obvious of these are higher grain feed costs that will hit both livestock and dairy producers especially hard:
The withering crops are translating into higher feed costs for livestock producers. "This is different than anything I've ever experienced
," said Kent Pruismann, who raises cattle and hogs on a farm in Sioux County, Iowa, and saw his costs for feed jump by 20% in July.
The higher corn, soybean and wheat prices will reach food makers, exporters and eventually consumers. Drivers already have seen fuel costs climb because of higher prices for ethanol
a corn-based fuel that is blended into gas. The drought also has
reignited the debate over whether ethanol production is a drain on
global food supplies.
Some are already turning to, shall we say, other means to keep their herds fed:
Kentucky cows eat candy instead of corn
Aug 14, 2012
LOUISVILLE, KY (WAVE) - When you think of cattle feed, you probably
don't think of candy, but due to the drought that's exactly what one
farmer chose to do.
At Mayfield's United Livestock in Western Kentucky, owner Joseph Watson feeds his herd second hand candy.
Watson started feeding his cattle the candy because corn prices were so high.
He mixes the candy with an ethanol by-product and a mineral nutrient.
He monitors the daily intake and said the cows have had no real health issues.
Yes, the higher grain costs are going to hit everything from big
cattle feedlot operations to my own two-bags-a-month chicken-feed
However, it will be the cost of and even lack of hay that will really
create some big problems later this year. The drought not only harmed
the range and pasture lands, forcing greater use of stored hay to
offset the decline in forage, but it put a huge crimp in this year's
Drought Cripples Hay Feed Industry
Aug 19, 2012
Widespread drought has scorched much of the pastureland and hay fields needed to sustain cattle herds
in the U.S., forcing many ranchers to find feed alternatives or sell
their animals early into what has become a soft beef market.
The shortage has led to higher hay prices, with some farmers saying they have to pay two to three times last year's rates
Despite farmers setting aside more land to grow hay this year, they are still producing a lot less because of the drought
, according to a recent Department of Agriculture estimate.
The harvest of alfalfa
, generally considered to make the best hay because of its high nutrient levels, is forecast to be the worst since 1953
, according to the USDA.
Pasture grass and hay are what most cattle are fed for the roughly two years they live before being slaughtered, but the drought is threatening to starve the animals.
Illinois rancher Steve Foglesong said that most years he could graze his cattle from spring through November on verdant fields that are now brown
, buying them hay bales only in the winter. This year, he and his animals have their eyes on withered corn plants.
"It may not have any ears on it, but it makes pretty good cow feed," he said.
John Erwin, who owns 20 acres of land in Shelbyville, Ill.,
said he is having trouble growing alfalfa hay, but demand is strong for what he can produce.
"I'm getting calls from ranchers as far away as Wyoming,"
Mr. Erwin said. "They're desperate."
He said he has been offered $250 a ton for his hay, nearly double
the $130 a ton in a non-drought year. His fields didn't produce any hay in July.
A doubling of hay prices is obviously going to create quite a bit of
economic hardship for many farming operations, which tend to be
marginal profit businesses even when everything is going well.
Here's another view on the hay situation:
spoke with Caldwell [of Indiana horse rescue] and a number of other
horse-rescue organizations around the country by telephone this week.
The relentlessly hot dry weather, amplified in many areas by wildfire,
has been devastating to farmers, ranchers and other horse owners.
"Everybody is using their winter hay now. The pastures are destroyed and they probably won't recover before winter,"
said Caldwell. "The price of hay has doubled, and the availability is down by 75 percent."
Caldwell is somewhat sanguine about his own lot, but not optimistic about what lies ahead.
"Today the problem is not nearly as bad as it's going to be,"
he told me. "It's terribly bad today, but it is going to get a lot
The drought has done some very serious harm to the nation's hay
supply that goes beyond the economics of higher hay costs. First
there's the supply of the hay, and then there's the relatively poor
quality of hay that was taken from non-irrigated, drought-stricken
fields. All in all, it's not a good situation.
To add a bit more difficulty into the situation, it turns out that
drought-stricken silage and even the corn itself can be harmful to
Drought makes corn dangerous for livestock
Aug 16, 2012
COLUMBIA, MISSOURI, U.S. - Tim Evans, an associate professor of
veterinary pathobiology and toxicology section head at the Veterinary
Medical Diagnostic Laboratory at the University of Missouri College of
Veterinary Medicine, Columbia, Missouri, U.S., warns U.S. farmers and
livestock producers that drought-damaged corn plants can pose a risk to animal health
"During severe drought conditions, corn plants, especially
those heavily fertilized with nitrogen, can accumulate a chemical
"This chemical can be very harmful to animals, especially cattle,
if they eat corn plants or other vegetation containing too much
nitrate. Eating plants with too much nitrate can cause damage to red
blood cells, resulting in lethargy, miscarriage, and even sudden
Evans says that in normal conditions, corn crops typically absorb
nitrate into only the lower 12-18 inches of the stalk, which does not
have to be fed to animals. However, during severe drought
conditions, high concentrations of nitrate can accumulate in the upper
portions of the stalk, which cattle and other livestock often eat.
Evans also says that many naturally growing plants and weeds in grazing pastures can accumulate nitrate during drought conditions, as well.
These plants include many types of grasses and some weeds, which
animals might be forced to eat because of limited pasture or hay
available as forage for livestock.
The key here is that nitrates are safe below 2,000 ppm but toxic
above 15,000 ppm, and the levels found in the stalks and how high it
travels are a function of whether enough rain fell to allow the plant
to take it up. Much of the corn crop was so desiccated that the plants
could not even manage to draw up this nutrient, and therefore it is
safe as a feed product.
While it's hard to get a read on at this early stage, there are
enough warning signs here pointing to much, much higher grain, food,
and meat prices in the future. The worry is whether there will even be
enough feed to sustain the animal populations through the Winter and
Spring. Given the damage to the harvestable corn, a lot of it is going
to be turned into silage
Many ranchers and farmers are faced with a horrible choice here.
Saving their herds may be economically unsound or even impossible where
hay and safe silage are not available, and so they are selling their
herds, one of the most heart-wrenching decisions anyone could have to
So many are doing this that recently the price for cattle has
dropped, as everyone is selling into an increasingly soft market. My
advice is to enjoy these low meat prices while they last, because the
next stage of this story involves much higher meat prices.
The problem with understanding just how bad the hay situation might
(or might not) be is that there are no national statistics collected
that could tell us whether or not there's even enough hay available to
sustain the current commercial and recreational livestock populations.
The Importance of Positioning Yourself
So, with all of these repercussions building during the current
drought - to which there's yet no end in sight - what can you do today
to minimize their impact on your budget and lifestyle?
Part II: Positioning for the Drought's Aftermath
looks at the likeliest outcomes in food prices, food availability,
energy prices, and macroeconomic consequences (of which there will no
doubt be many from this drought). We have a national food distribution
system that runs significantly on a just-in-time basis, which leaves it
vulnerable to price and inventory shocks when there are supply
disruptions. The reduced water levels caused by the drought are
handicapping electrical power generation in growing regions in the
country; electrical thermal plants are the number one biggest user of
water in the U.S.
The global financial markets are similarly tenuous these days, as
resources are already taxed in trying to stimulate the moribund U.S.
economy and dig Europe out of its massive credit woes.
This is one of those moments where taking simple, prudent steps now
can have an outsized effect on preserving your quality of life.The
groundbreaking video I just recorded with the excellent team at Money
May Press also addresses the heart the problems written about here.
It focuses on steps we individuals can take to decrease our
vulnerability to the myriad of problems that threaten very our way of
life. You can see this report by clicking here.
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