Drought effects go well beyond corn, soybean crops

by Ron Sterk
Share This:

The impact of the most widespread U.S. drought in more than 50 years is obvious on basic commodities such as corn and soybeans, sending both to all-time record highs two weeks ago. But there also is a major “trickle-down” effect on other products such as eggs, meat and milk, as well as in less obvious products, such as beverages sweetened with high-fructose corn syrup and related corn-based items.

“The severe drought in the Midwest is expected to affect prices for corn and soybeans as well as other field crops, which should, in turn, impact retail food prices,” the U.S.D.A.’s Economic Research Service said in its latest food price outlook last week. The agency left unchanged its inflation forecast for all food and food at home (grocery store) prices for 2012 at 2.5% to 3.5%.

The E.R.S. noted that about 14% to 15% of a basic commodity price increase generally is passed on to retail products using that commodity as an ingredient. Specifically, the agency noted that if the farm price of corn increases 50%, then retail food prices as measured by the Consumer Price Index will increase by 0.5% to 1%. The United States is currently in that territory.

Nearby September corn futures prices at the Chicago Board of Trade set an all-time high of $8.28¾ a bu on July 20, closing at $8.24½ that day, up 62% from the recent low close of $5.09½ on June 15 but up “only” 20% from $6.88 on the same date a year ago. Last week corn futures prices retreated modestly on outside market pressure and scattered rainfall across the Midwest, which in several cases was too little, too late. At the same time, the cash basis has remained strong due to tight old crop corn supplies, resulting in significantly high-er prices paid by livestock feeders or corn millers for the grain near term, depending of course on at what price buyers may have hedged their needed supply.

Soybean and soybean meal futures prices also set record highs. Nearby August soybean futures set a high of $17.77¾ a bu on July 20, closing at $17.57½, up 33% from the recent low close of $13.18½ on June 1 and up 28% from $13.78¼ a year earlier. August soybean meal futures set a record high of $552 a ton on July 20, closing at $543, which was up 42% from the June 1 low close of $381.10 and up 50% from $361.90 a year earlier.

Corn crop withering

The U.S.D.A.’s initial forecast of a record large 14,790 million bu 2012 corn crop was slashed 12% to 12,970 million bus in its July World Agricultural Supply and Demand Estimates and most assuredly will be slashed again when the first survey-based estimate comes out Aug. 10. The July estimate cut the average yield forecast by 20 bus, or 12%, to 146 bus an acre, with some analysts now expecting an average national yield closer to 135 bus an acre or less. The WASDE estimate did not account for additional “abandonment,” or acres not harvested because they did not produce grain, which will take the production total even lower.

Corn is the most widely grown grain crop in the United States, accounting for 30% of total planted area this year, according to the U.S.D.A.’s June Acreage report. Corn’s influence is wide, affecting other commodity prices, food and even energy. Roughly about 35% of total annual supply is used for feed (and residual), 35% used for ethanol, 12% exported, 10% used for food and seed and 8% carried over to the next marketing year. All of the categories will be affected by higher prices and tighter supply in 2012-13.

With the exception of only a slight decrease in use of corn for food, the U.S.D.A. in July already trimmed the forecast use of corn for ethanol by 2% from its June estimate, feed use by 12%, exports by 16% and ending stocks by 37%. The U.S.D.A. did double its forecast for 2012-13 U.S. corn imports to 30 million bus in its July WASDE, which is only a fraction of the loss in production, except on a regional or specific company basis. Last week there were reports that Smithfield Foods would import some corn from Brazil for its hog feeding operations.

Livestock, milk impact significant

Because a significant portion of the cost of producing livestock for meat and milk goes to feed, the significant price increases for corn and soybean meal may mean nothing but lower to negative profit margins, or even liquidation in some cases. Adding to the impact are “burned up” pastures and soaring hay prices, which may require expensive supplemental feed.

In its food price outlook, the U.S.D.A. said it expects 2013 price indexes for beef to rise 4% to 5%, pork 2.5% to 3.5%, chicken and turkey 3.5% to 4.5%, dairy products 3.5% to 4.5% and eggs by 3% to 4%. Price indexes for July will be released July 31. It should be noted that choice retail beef prices already set an all-time high of $5.09 a lb in January, while monthly prices for all beef have set successive record highs since then.

In its July Livestock, Dairy and Poultry Outlook, the E.R.S. led nearly every category with higher feed prices:

• Cattle — “Feeder cattle prices have responded predictably to rising corn prices, moving lower as corn prices escalate and cattle feeders react to extremely negative margins.”
• Hogs — “Prospects for significantly higher feed prices are likely to temper further gains in U.S. (hog) breeding herd numbers.”
• Broiler — “Rising grain prices and the sluggish economy are expected to result in lower broiler production in the second half of 2012 and to lower production in 2013.”
• Milk — “Lower yield forecasts for feed grains and oilseeds will lead to sharply higher feed prices for the balance of 2012 and into 2013 and will likely accelerate production declines.”

Eggs, egg products shoot higher

While much of the drought impact may not be seen until 2013 or even longer term in the form of less red meat due to slower hog and cattle herd rebuilding because of high feed costs, some impact was obvious and sudden, as in the case of eggs.

Prices for breaking stock eggs used by processors have soared 50% since July 6 with most of that gain in the past two weeks. Egg product prices also have soared with liquid whole eggs and yolks up more than 30% in two weeks and whites up 15%. Frozen whole egg and yolk prices were up about 12% with whites only slightly higher. Dried egg prices were more varied with yolks up 14%, whole eggs up 8%, blends up 5% and whites up 2% during the latest two-week period.

But there were multiple factors at work in the egg market run-up. Hot weather caused chickens to lay fewer large eggs, which are preferred at retail. At the same time, larger breaking stock eggs were diverted to the higher-price retail market, tightening eggs available to processors and driving prices up.

In addition, export demand was a factor. Mexico, already a major U.S. egg buyer, boosted imports of U.S. eggs because of an avian influenza outbreak in that country. At the same time, tight egg and egg product supplies in Europe, the result of new cage laws that went into effect Jan. 1, resulted in increased demand for U.S. egg products. One processor noted that a significant amount of U.S. product had been committed to export in the second and third quarters, when egg prices typically are lowest, before the severity or impact of this year’s weather was known.

“All I’ve been doing this week is apologizing to my customers,” a Midwest egg processor said, “and telling them that more price increases are coming.”

“The market has gone nuts,” an egg processor in the Southeast said.

Corn price rises are far reaching

For products like corn sweeteners used in many food and beverage items and exported to Mexico, the impact will be felt next year when the much smaller-than-expected 2012 corn crop is utilized. Just two months ago analysts were calling for slightly lower corn sweetener prices for 2013 (2012 corn crop), but in the past couple of weeks talk has turned to possible increases of around 5c a lb for 2013 contracted supply.

Escaping much of the drought impact is sugar beets. The Upper Midwest (Red River Valley), the largest growing region in the country, received what one trader called “a million dollar rain” last week that brought more than two inches of rain to parts of the valley. But again, higher corn prices, and consequently potentially higher corn sweetener prices, may put a floor under sugar values in 2013. It should be noted that sugar beet crop ratings in the top two producing states of Minnesota and North Dakota were above year-ago levels as of July 22, but ratings in Colorado and Wyoming were below year-ago levels.

Wheat offers some relief to the otherwise bleak grain picture with most of the winter crop harvested before the drought could significantly lower yields, and the spring crop grown in the Upper Midwest, where weather has been more moderate. Still, raging corn prices have pulled wheat values higher in their wake. And more wheat likely will be diverted to feed use in place of high-priced corn.

The other key crop hit by the drought is soybeans, by far the largest oilseed grown in the United States (and the world) with roughly about 49% of total supply crushed domestically for meal and oil, 42% exported, 4% for seed and residual and 5% carried into the next marketing year.

Although grown largely in the same region as corn and therefore also significantly impacted, the soybean crop is expected to fare a bit better because of its later planting. The average yield forecast was trimmed 8% and 2012 production was cut by 5% in the July WASDE. But the latest soybean crop ratings were only marginally better than those for corn, and soaring corn prices were a factor in the rise to record highs of soybean prices as well.

Of course one of the concerns about the latest bout of forecasts is that corn and soybean yield and production estimates were based mostly on trend analysis with the first survey-based estimates out Aug. 10. But more importantly, the inflation and other forecasts were made well before the drought “has run its course,” with the full effects still unknown. Be assured there will be more fallout from the drought, even if the worst of the hot weather may be in the past.

Comment on this Article
We welcome your thoughtful comments. Please comply with our Community rules.



The views expressed in the comments section of Food Business News do not reflect those of Food Business News or its parent company, Sosland Publishing Co., Kansas City, Mo. Concern regarding a specific comment may be registered with the Editor by clicking the Report Abuse link.