U.S. corn is suffering under historic drought conditions, causing crop yield projections to drop over the past two months. As result, corn prices have increased by more than 50 percent since the first quarter of 2012.
As the largest global producer and exporter of corn, the United States is under domestic and international pressure to keep prices as low as possible. Though the drought is the primary cause of the recent price increases, growing biofuel production spurred in part by U.S. government mandates over the past decade has also heightened demand for corn, adding upward pressure on prices. Even if these mandates were to be removed, however, prices would not necessarily decrease since ethanol production is only one of many factors influencing the commodity.
Analysis by Stratfor (click here to visit their excellent website)
Field corn accounts for the vast majority of the crop produced in the United States, and the starch derived from it can be used as the feedstock, or starting material, for ethanol production. By contrast, sweet corn, the kind most often used in canned or frozen foods or eaten fresh, accounts for less than 1 percent of total U.S. corn production. More than one-third of the country’s field corn gets used to make ethanol, with the rest used as livestock feed or as a base in a variety of foods such as corn syrup and flour.
Ethanol production began to increase significantly in the early 2000s after becoming a popular gasoline blending component used to increase octane levels and meet Read the rest of this entry »
More than half of the country was under moderate to extreme drought in June, the largest area of the contiguous United States affected by such dryness in nearly 60 years. Nearly 1,300 counties across 29 states have been declared federal disaster areas. Areas under moderate to extreme drought in June of each year are shown in orange below. Last month surpassed July 1936, the depths of the Dust Bowl, as the hottest month on record in the lower 48 states. The Department of Agriculture has declared almost 1,700 counties — about 56 percent of all U.S. counties — as natural-disaster areas caused by a drought that has seared millions of acres of pasture and cropland from Nebraska to Texas. Prices of wheat and corn have risen so much that ranchers have slaughtered cattle to avoid the cost of feeding them.
Source: New York Times
Related article: Drought Disrupts Everyday Tasks
The plunge in the water supply is mostly the result of a simple geological process. Without rain, aquifers deep beneath the ground have not been getting the water that seeps into the earth to replenish their supplies. In one part of northwest Indiana, the groundwater level had dropped as much as 40 feet since late spring, or about eight times more than it normally does.
Corn futures surged 58 percent since mid-June, soybeans were up 31 percent and wheat 41 percent. The US drought may push food inflation as high as 4 percent in 2012, the USDA said last week.
The department has declared natural disasters in more than 1,800 counties in 35 states, more than half of the country’s total, mostly because of the dry, hot weather.
The following extract from Jeremy Granthams Quarterly Investor Letter “Welcome to Dystopia” certainly makes a valid point.
“Globally, 2010 looked to me like a 1-in-150-year event with heroic heat in Russia and elsewhere and biblical floods in Pakistan and Australia. It really hurt global grain output. I suggested then that surely the following season had to be at least less bad, and what did we get? Thailand, the largest rice exporter was knee-deep in floods overhalf the country, 80-year floods occurred in the Mississippi, Texas sweltered in way-above record heat, and quite severe droughts gripped many other places. Perhaps in total a 1-in-50-year event globally. So, after all, perhaps Iwas right; it was “less bad” but hardly what I meant. And now, quite suddenly, even while I was thinking about this letter, 1-in-50-year drought and heat have hit our major growing areas. So let’s call this a 1-in-20-year globally, for Brazil, Argentina, Russia, and several other areas are also having unusually bad weather. Any statistician starts to getjumpy when looking at 1-in-150, 1-in-50, and 1-in-20 back to back. Long-term weather records are poor and a lot ofthis is judgmental, but this three-year stretch is, shall we say, very unusual. (The National Oceanic and Atmospheric Administration has said that the chance that this year’s heat in the Midwest was not affected by a warming climate was over 1 in 1 million. Other sources have used much punier odds, such as 1 in 100,000. I will settle for “very unusual.”) We really have to start factoring into the investment equation increased odds of difficult and volatile growing weather.”
The USDA released a much anticipated crop report this morning, the first official survey detailing just how bad the drought has hit the nation’s farm belt. Corn took a big hit, with production estimates now down 17% from a year ago, somewhat worse than predictions beforehand that the hit would be around 15%. It would be the lowest corn production since 2006.
Soybean production estimates were also cut, although not as sharply as for corn.
Corn futures hit a record yesterday, and spiked in the immediate aftermath of the report this morning, although they are now actually lower.
From the Dow Jones story by Bill Tomson:
USDA’s new estimate for average corn yield in the U.S. is just 123.4 bushels per acre and that would put it at the lowest level in 17 years. Last month the USDA was predicting the average corn yield at 146 bushels per acre.
Demand for this year’s crop is also expected to decline along with production, but the USDA still pushed its forecast for 2012-13 ending stocks lower.
“Ending stocks for 2012-13 are projected at 650 million bushels…and the smallest carryout since 1995-96,” the USDA said in the supply and demand report.
This is going to put pressure on the demand side of the equation, since corn is not just a staple of backyard barbecues. One ag research outfit said production at these levels would equal a “demand nightmare.”
USDA pegged new crop corn yield at 123.4 bpa vs. consensus of 127.3.
Harvested acres of 87.4m were above the forecasted 86.4m, leading to production of 10.779b bu compared to the forecast of 11.026b. Old crop ending stocks of 1.02b were above consensus of 924m bu as Ethanol and Exports were each reduced 50m bu. New crop ending stocks came in at 650m vs. the forecast of 660m. Imports increased 45m to 75m. Feed & Residual was slashed 725m bu to 4.075b bu. This requires substantial livestock liquidiation, which requires higher prices for longer. However, it is a long‐term negative as it will take time to rebuild herds once corn prices normalize.
Ethanol was cut 400m bu to 4.5b, equating to 12.375b gal, below the crop year mandate of 13.6b gal. Hence, USDA is assuming 1.2b of the 2.6b RINS will be used. Non‐ethanol Food, Seed & Industrial use was cut 70m bu. Exports were dropped 300m bu. New crop stocks‐to‐use fell from the July estimate of 9.3% to a tight 5.8%, below old crop of 8.2% and the 10‐yr average of 13.5%.
Soybeans: bullish, despite higher ending stocks USDA estimated new crop soybean yield at 36.1 bpa vs. consensus of 37.8. Harvested acres of 74.6m were slightly below the estimated 74.8m. Production of 2.692b bu trailed the forecast of 2.817b. Old crop ending stocks of 145m were below consensus of 158m, while new crop ending stocks of 115m came in above the forecasted 112m. Imports were raised 5m to 20m.
Crush was cut 95m bu and Exports slashed 260m bu, leaving new crop sales at 50% of the USDA’s annual estimate. New crop stocks‐to‐use was unchanged at 4.2%, compared to old crop of 4.6% and the 10‐year avg of 8%.
All wheat production of 2.268b bu was above consensus of 2.205b. US ending stocks of 698m were above the forecast of 673m.
New crop corn ending stocks of 123.3 were above the forecast of 122.7 MMT. Corn production was raised in Argentina, Brazil, Mexico, China, and S. Africa, but reduced in Canada and the Ukraine. Chinese corn imports were cut 3 MMT to 2. Soybean ending stocks fell to 53.38 vs. consensus of 54.2 MMT. Chinese soybean imports were cut 1.5 MMT. Wheat ending stocks of 177.17 came in below the avg estimate of 178.9 MMT. USDA cut FSU production 5.6 MMT with Russia down 6 MMT to 43. Argentine wheat fell 0.5 MMT, but Canada was increased 0.4 MMT and India revised up 2.9 MMT. No change to Australia.
“I thought that $6 corn was end of the world. I never could have realised that I would be thankful to be buying it at $7.”
-Larry Pope, CEO of Smithfield Foods, the US based meat producer to the Financial Times. The cost of corn and soyameal, the main ingredients in animal feed, have set records this month as the worst drought in half a century and extreme heat damages crops in the US, the world’s main surplus producer.
The Midwest is facing a severe drought that is causing corn and soybean crops to wilt under severe weather conditions.
Commodities guru Jim Rogers, however, says while this drought is severe for those suffering from it, there are much larger problems in agriculture as a whole.
In a telephone interview he said, “the drought is a big deal if it’s not raining on your farm. But it is good for farmers in other parts of the world. You can’t have perfect weather conditions everywhere, every year. And with all the other problems, we’re hitting trigger points.”
What are these other problems?
Rogers rattled off a list. The highest rate of suicide in the UK is among farmers. The average age of farmers in Japan is 66 and the average of farmers in the U.S. is 58. In India, hundreds of thousands of farmers have committed suicide in recent years. He even noted that more people study public relations than agriculture.
Rogers said the media may be focused on the drought, but these longer-term problems that are much bigger.
“The world faces serious problems in agriculture. We are facing shortages of everything. The inventories are near historic lows so any problem will have an immediate, profound effect. We are facing a shortage of farmers so any problems will turn into even bigger.
…But any weather problems will have big effects because of the dire situation in farming. Agriculture will be one of the best sectors of the world economy for years as I have told you often.”