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Jul 27, 2012 ||
The severity of this year’s drought in the United States can be reflected in all sorts of data. One of the more alarming statistics gives you a sense of its geographic reach: 88 percent of the nation’s corn crop is in regions impacted by drought, according to the USDA. The corn crop, initially expected to yield a record 166 bushels per acre, has been cut back to 146, with many analysts expecting that number to fall further in the next USDA supply/demand report on August 10.
As an OpenMarkets story earlier this week notes, corn crops in Iowa, the nation’s largest corn-producing state, received an average of just 1.55 inches in June. The crop there needs about three times that to produce optimal yield.
In Illinois and Indiana, matters are worse. According to a Reuters story this week:
“In Putnam County, Indiana the crop scouts did not even stop to inspect corn fields because it was assumed the crop was so poor that farmers would plow it under rather than try to harvest nothing.”
For consumers, this may eventually result in higher food prices. The USDA this week gave its first projections for 2013 food prices, estimating that they will increase 3 to 4 percent, up from the 2.5 to 3.5 percent range expected this year.
The increase is almost certainly a direct response to record grain prices brought on by the drought.
For farmers and ranchers, the hot, dry weather – or a sudden rain shower that interrupts it – can move prices quickly, and make an unpredictable industry even more so. That’s where futures markets serve an essential purpose. Locking in a price for their grain or establishing a floor using put options helps farmers establish profit for the limited yield they produce this fall, and keep their business moving. The same markets help processors, animal feed producers and food manufacturers limit their costs when buying a rain-dependent commodity during a drought.
To buyers and sellers of corn and soybeans, markets are one of the few places they can go for certainty while enduring extreme weather conditions. As the situation progresses, we’d like to get your feedback.
How has the drought impacted you?
David Lehman is managing director of commodity research and product development at CME Group.
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