FarmPolicy

Ripple Effects of the 2012 Drought Broaden

Drought Conditions, Prices, and Contract Delivery Concerns

Bloomberg writer Brian K. Sullivan reported yesterday that, “The two worst levels of drought now grip nearly one-fourth of the lower 48 states, the U.S. Drought Monitor reported.

“About 24.1 percent of the region was suffering extreme or exceptional drought in the week ended Aug. 7, up from 22.3 percent in the previous period and 18.3 percent last year, according to the monitor, based in Lincoln, Nebraska.

The article noted that, “While there has been some improvement in the drought in the Midwest, that wasn’t the case in the Great Plains, said Mark Svoboda of the National Drought Mitigation Center in Lincoln.

“‘Maybe the drought overall is improving but the areas hardest hit in the corn and bean belt have intensified,’ Svoboda said by telephone.”

Mr. Sullivan explained that, “The primary corn and soybean agriculture areas in the U.S. had their sixth-driest April-July growing season in records dating back to 1895, the National Oceanic and Atmospheric Administration said yesterday.

“Svoboda said the amount of corn-growing area affected by the two worst categories of drought has jumped to 53 percent from 14 percent in the past three weeks. For beans, it has increased to 50 percent from 16.”

More specifically with respect to livestock, yesterday’s Bloomberg article added that, “In addition, 37 percent of the main livestock-producing area is now covered by the two most-severe drought levels, Svoboda said. Farmers and ranchers who can’t get feed at home also can’t find it nearby because the drought is so widespread, he said.

“‘Range, pasture and forage land has just been battered,’ Svoboda said. ‘This is something that we haven’t seen, save for a couple of times, in the last hundred years.’”

The AP reported yesterday that, “Growers in Iowa — the nation’s biggest corn and soybean producer — saw their conditions further deteriorate, with the amount of that state in extreme or exceptional drought more than doubling from 30.74 percent last week to 69.14 percent now. In neighboring Nebraska, the expanse of land considered in the two worst drought categories rose to 91.2 percent, up 8 percentage points. The amount of Kansas in exceptional drought also more than doubled, up to 38.58 percent from 17.45 percent, while extreme or exceptional drought in Illinois spiked roughly 10 percentage points, to 81.18 percent.”

Liam Pleven reported in today’s Wall Street Journal that, “A rash of bad weather—from a drought in the U.S. to a hot summer in Russia to excessive rain in Brazil—is straining the global food chain and pushing up prices around the world.

“The United Nations Food and Agriculture Organization on Thursday said its index of global food prices rose 6% in July, the biggest increase since November 2009. The index, which measures the export prices of food, is 10% below its February 2011 record.

“Prices for corn, wheat and soybeans rose in the futures markets Thursday, pointing to the risk of further food-price increases. Corn’s 1% rise put it up 47% since May 31, before the drought took hold, while soybean prices climbed 4% Thursday and are up 26% over the same period.”

Today’s Journal article indicated that, “The increases reflect damage done by dry, hot Midwest weather to what were once expected to be bumper crops of corn and soybeans, which are critical livestock feeds that can drive retail prices for meat and dairy. Commodity traders and market observers expect the U.S. Department of Agriculture to cut its harvest estimates for both crops in its monthly crop report on Friday.

“One factor easing the situation is healthy supplies of wheat and rice, staples widely consumed by the world’s poor. And oil prices are lower than their 2008 peak, which means that fuel costs that trickle into food prices can be lower.”

A separate Dow Jones article from yesterday reported that, “The U.S. Department of Agriculture will release its monthly supply-and-demand report Friday at 8:30 a.m. EDT… Analysts on average expect the USDA to cut its U.S. corn-production forecast by 15% to 10.97 billion bushels due to drought, according to a Dow Jones Newswires poll of analysts. As a result, analysts also expect the USDA to forecast domestic corn inventories at the end of the 2012-13 marketing year at the lowest level since the 1995-96 marketing year.”

Reuters writer Catherine Hornby reported yesterday that, “The world could face a food crisis of the kind seen in 2007/08 if countries restrict exports on concerns about a drought-fuelled grain price rally, the UN’s food agency warned on Thursday, after reporting a surge in global food prices in July… ‘There is potential for a situation to develop like we had back in 2007/08,’ the FAO’s senior economist and grain analyst Abdolreza Abbassian told Reuters.

“‘There is an expectation that this time around we will not pursue bad policies and intervene in the market by restrictions, and if that doesn’t happen we will not see such a serious situation as 2007/08. But if those policies get repeated, anything is possible.’”

Domestically, an update yesterday from the University of Missouri Extension Service stated that, “The problem is that the drought has dramatically reduced the feedstuffs that animal agriculture needs to raise cattle, swine and poultry. Corn yields, [Scott Brown, research assistant professor in the MU College of Agriculture, Food and Natural Resources] said, will probably suffer a 10 percent or more decrease compared to last year. This has caused corn futures to jump to $8 per bushel in late July from $5.50 per bushel at the beginning of June.

“Soybean meal and hay prices, also staples as animal feed, have also reached extremely high levels. ‘It is sobering to realize that 2013 feed expenses very well could be three times higher than the 1990-2004 average, and 70 percent above the 2007-2010 average,’ Brown pointed out.

“The livestock industry will experience a lot of short-term pain as it tries to adjust, Brown commented. Some producers will have to exit the industry, he said. Producers are already culling and slaughtering their existing animal inventories to a level they can afford to feed.”

Yesterday’s update added that, “Brown said that the pork and chicken industries will fare worse because there are not many substitutes for their rations of corn and soybeans.”

An update yesterday at Iowa Farmer [corrected, 8.10] Today Online pointed to a separate issue associated with the drought: “Drought may leave farmers short on forward contracts.”

Tim Hoskins reported that, “Crop farmers with crop insurance should be able to weather the drought, says Chad Hart, Iowa State University grain marketing specialist, but there could be issues with forward-contracted grain.

“‘Crop farmers will be OK, but it won’t be pretty,’ he says.”

The Iowa Farmer Today article explained that, “However, some farmers are beginning to realize the severity of the drought means they may not have enough grain to settle forward contracts… [Hart] says there likely will be sellers’ remorse among farmers who forward contracted this past spring for what was then a good price, but grain prices have since soared as the drought takes its toll.

“Hart says some farmers might be tempted to not deliver on those contracts to get a higher price.

“That would throw even more chaos into the system, he adds, and that is not a good idea.”

Meanwhile a news update on Wednesday from Iowa State University stated that, “While the drought has created hardship for farmers across the spectrum, it’s more difficult to find a silver lining if you’re a livestock producer, [Chad Hart, an Iowa State University Extension and Outreach grain markets specialist and associate professor of economics] said.  Crop insurance doesn’t help cattle or swine producers, and the high corn prices will only make it more expensive for farmers to feed their herds.

“‘There’s going to be a tremendous flow of dollars late this year in the form of crop insurance,’ Hart, said. ‘That’s going to help offset some of the effects of the drought.  But there are fewer options for livestock, and that’s going to create some headaches for producers.’

“Making matters worse, this is the second consecutive year drought has slammed the livestock industry.  States like Texas and Oklahoma battled witheringly dry conditions last year, sparking trends in the beef industry that have carried over into 2012’s drought.  U.S. beef cow slaughter totals surged in 2011, driven in part by drought-stricken producers in the Southwest liquidating or reducing their herds.  Beef cow slaughter in 2012 generally has tracked below the 2011 totals and has more closely resembled the averages taken between 2006 and 2010, according to the U.S. Department of Agriculture National Agriculture Statistics Service.”

The Iowa State item noted that, “‘As feed prices rise, producers are doing the math and figuring that it makes more sense to reduce their herds in many cases,’ said Lee Schulz, ISU Extension and Outreach livestock specialist and assistant professor in economics.  ‘This trend emerged during the 2011 drought, and we’re seeing it manifest in other ways this year.’

“Schulz said this year’s more widespread drought has had a greater impact on Midwestern dairy states, and the resulting higher feed prices have pushed producers to cull more dairy cows than in previous years.   More than 60,000 dairy cows were slaughtered in the third week of July 2012, a 22.3 percent increase over the same week in 2011.”

With respect to policy remedies, the Iowa State news item explained that: “Farmers looking to Washington, D.C., for help have gotten decidedly mixed results.  The U.S. Department of Agriculture has provided some relief by allowing farmers to use conservation land and some wetlands for grazing and pasture.

“However, Congress failed to pass a comprehensive farm bill before adjourning for a weeks-long August recess while the programs governed by the current farm bill are set to expire in September.  Additionally, the U.S. Senate adjourned without taking action on legislation approved by the House of Representatives that would resurrect expired programs aimed at providing emergency relief to livestock producers.

“‘The USDA has already fired the only bullet at its disposal, and there isn’t much else that can be done without the approval of Congress,’ Hart said.

“For now, livestock producers are stuck with uncertainty.”

Recent news item have pointed out that, Rep. Kristi Noem (R., S.D.), Jeff Fortenberry (R., Neb.), Sen. Dick Durbin (D., Il.) and Sen. John Thune (R., S.D.) have called for greater policy certainty and for the House to vote on a five-year Farm Bill.

Also with respect to policy, an update posted yesterday at the farmdoc daily Blog, (“Price vs. Revenue Farm Safety Net”) by Ohio State University Agricultural Economist Carl Zulauf stated in part that, “An issue of disagreement during the 2012 Farm Bill debate is whether the farm safety net should focus on revenue or price. Until the ACRE program was enacted in the 2008 Farm Bill, farm programs focused on price. This article compares price and revenue programs, focusing on the key role played by the correlation between changes in price and changes in yield. The examination finds that converting to a revenue based farm safety net will likely increase the effective risk management provided by the farm safety net and will likely result in more support being provided to Southern crops.”

Renewable Fuel Standard (RFS)

Javier Blas and Gregory Meyer reported yesterday at The Financial Times Online that, “The UN has called for an immediate suspension of government-mandated US ethanol production, adding to pressure on Barack Obama to address the food-versus-fuel debate in the run-up to presidential elections.

“Most US ethanol is made from corn. The dispute over ethanol promotion pits states such as Iowa that benefit from higher corn prices – and in some cases are swing states in the election – against livestock-raising states such as Texas that are helped by lower corn prices.”

The FT article noted that, “The UN intervention will be seized upon by state governors, lawmakers and the meat and livestock industry, who have expressed alarm at surging prices for corn. Members of the Group of 20 leading economies – including France, India and China – have already expressed concern about the US ethanol policy.

“The US is poised to divert around 40 per cent of its corn into ethanol because of the Congress-enacted mandate despite ‘huge damage’ to the crop because of the worst drought in at least half a century, José Graziano da Silva, director-general of the UN’s Food and Agriculture Organisation, warned.”

A news release yesterday from the National Corn Growers Association indicated that, “Last week 154 members of the House of Representatives sent a letter that included inaccuracies to EPA Administrator Lisa Jackson urging a waiver of the Renewable Fuel Standard.  Today, National Corn Growers Association President Garry Niemeyer sent a letter to every member of the House of Representatives setting the record straight.

“‘Unfortunately, the letter sent to EPA Administrator Jackson did not provide accurate information about the amount of corn used to produce ethanol or livestock feed,’ Niemeyer stated in the letter.  ‘Furthermore, it lacks a comprehensive description of the ‘burden of proof’ required under the RFS waiver provisions. The letter relies on long discredited claims that opponents of the RFS have continued to reference in their on-going efforts to repeal the RFS.’”

And, the “Washington Insider” section of DTN pointed out yesterday (link requires subscription) that, “Overall, the process of changing the RFS remains murky. While the EPA administrator has the basic authority to make such a decision, that decision would need clearance at the Office of Management and Budget level and will be based on discussion and recommendations from many agencies. These will hang on expectations of the size of the crop and the corn price, experts say and current guesses are that it will take prices in the $9 to $10 per-bushel range to move the government to intervene in this market. And, the decision also will factor in expected effects on gasoline prices, food prices, soybean meal/DDGs, price and supply, corn exports, feed supply and corn seed supply.”

Zack Colman reported yesterday at The Hill’s Energy Blog that, “The so-called advanced biofuels industry is applying new pressure to convince lawmakers that their products will be collateral damage if Congress scuttles the national ethanol mandate.

“The Biotechnology Industry Organization (BIO) has been warning its political allies on Capitol Hill that attacks against corn ethanol will hinder next-generation fuels, too.”

SNAP- Food Stamps

The AP reported yesterday that, “The Agriculture Department says it is going to impose tougher penalties on stores that violate food stamp rules and give states new tools to root out applicants who are ineligible for the benefit program that now covers about 1 out of every 7 Americans.

“The move to shore up integrity in the program comes as Congress struggles to pass a $100 billion-a-year bill that will fund food stamps and determine farm policy for the next five years. Some 80 percent of the money in the farm and nutrition bill goes to the food stamp program.”

Yesterday’s article pointed out that, “Department Undersecretary Kevin Concannon stressed that the Supplemental Nutrition Assistance Program already has one of the best track records among federal programs in fighting violations, with a trafficking or abuse rate of only about 1 percent of total transactions.

“But in a program where even a small amount of abuse can amount to millions of dollars, ‘we are very mindful of public confidence’ that only those who qualify for benefits will receive them, he said.”

DTN Ag Policy Editor Chris Clayton reported yesterday (link requires subscription) that, “The House farm bill would further reform SNAP by eliminating what is called ‘categorical eligibility’ for SNAP. Under categorical eligibility, states will enroll a person in SNAP if they are signed up for other programs such as low-income heating assistance. One problem is that people can get enrolled in SNAP even if their other state benefits are modest or even nonexistent. The House farm bill would save about $16 billion from SNAP. The Senate bill would cut about $4.5 billion from the program.

“Concannon said both versions of the farm bill would further improve program integrity in SNAP.

“USDA also released data highlighting that the department penalized 574 stores over the past three months for violating SNAP rules and permanently disqualified 1,016 stores for either swapping SNAP benefits for cash or falsifying applications to be in the program.”

Related audio from yesterday’s conference call with Undersecretary Concannon can be heard here.

Keith Good

Posted by Keith Good • August, 10, 2012 • 4:03 am