2012 Drought: Why the Midwest Matters

Midwest Drought 2012

 

The Midwestern United States is one of the key grain-producing regions in the world. Its mix of good soil, favorable climate, up-to-the minute technology and educated workforce make it a critical area to world grain markets. With this year’s drought severely diminishing the region’s expected output for corn, wheat and soybeans, the effects on the world food chain could start to show.

How much production will be affected is uncertain because some crops are still growing, but the U.S. Department of Agriculture already cut its estimate of this year’s corn production by 13 percent from last year and many market participants say the 10.7 billion bushel September estimate for national output likely will fall further.

Drought is affecting a portion of nearly every state, according the U.S. Drought Monitor, which is published by the National Oceanic Atmospheric Administration, with the Midwest being hit the hardest. Mike Tannura, chief meteorologist, T-Storm Weather says for the seven major Midwestern corn and soybean producing states, the June-July timeframe was the third-driest in 118 years and the most stressful for crops since the Dust Bowl year of 1936.

The total Midwest is defined as Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, Ohio, North and South Dakota and Wisconsin.

The Midwest has two critical factors that make it so productive: great soil and usually mild weather, says Abdur Chowdhury, professor and chair of economics in Marquette University’s College of Business Administration.

“The Midwest soil is some of the richest not only in the U.S., but of some of our trading partners,” he says. “The weather – of course this year is an exception – but the weather is quiet receptive to agriculture production.”

Midwestern farmers are highly trained, which boosts productivity, and their significant capital investments and use of biotechnology also increase output, Chowdhury says.

Tannura said weather and soil are really a symbiotic relationship which is why this region is carpeted with grains. “We have very good soil,” he says. “We have frequent rainfall and the ideal temperatures for growing corn and soybeans. That feeds back into the soil.”

Had it not been for the drought, a state like Illinois, which is the second-biggest U.S. corn and soybean producer, might have had a bumper crop.

Emerson Nafziger, crop sciences professor at the University of Illinois says that despite a dry spring, overall crops were off to a solid start with good stands, few foliar diseases and little loss of nitrogen.

“So lack of water is just about the only problem this year, and thus crop conditions reflect almost entirely the amount of soil water that has been available,” he says.

Tannura says not only was it the third-driest summer in the Midwest since recording began in 1895, but in Illinois, Iowa and Indiana, temperatures have been above average since November 2011, something that’s never happened in recorded weather history.

There’s little farmers can do but hope Mother Nature starts to cooperate, because even the deepest, darkest prairie soils that can hold water longer than other types of dirt can’t do it forever. “There’s no soil moisture anywhere today to carry the crop” until harvest, Nafziger says.

Midwest “Huge Player” in Food Scene

Paul Mariani, director at Variant Capital Advisors, says Midwestern agriculture production is a “huge player” not only in the United States but on the global scene in exports. “Grains touch the entire food chain… corn is in everything from cereal to glue,” he says.

According to the U.S. Department of Agriculture, last year the region produced 85 percent of the more than 10.4 billion bushels of corn binned,  and 81 percent of the more than 3 billion bushels of soybeans produced. .

The productive soils of the Midwest helps the U.S. retain its crown as number one exporter of corn and the United States is usually the top soybean seller globally. According to the USDA, corn exports make the largest net contribution to the U.S. agriculture trade balance of all agricultural commodities. As recently as last year, the United States was responsible for nearly half of the world’s corn export. This year’s drought is expected to cut into that sales pace, the USDA says.

Just how much production was lost because of the drought won’t be known until after harvest, but the ripple effect is being felt from industries tied to grain production, such as ethanol producers, livestock ranchers and ag equipment sellers, says Ernie Goss, Creighton University economics  professor.

In Creighton’s Rural Mainstreet Index for August, 31 percent of bankers surveyed said drought was hurting their business activity, with 46 percent saying livestock producers in their area were reducing herd sizes because of the drought. That figure was only 13 percent in the July report.

Mariani says that ultimately protein prices will rise as it will take several years to rebuild herds after ranchers pulled forward hogs and cattle to slaughter because of high feed costs.

The drought may hit U.S. GDP too. Depending on harvest results, it could drop GDP by anywhere from 0.1 percent to 0.5 percent, when combining grain and livestock production, Goss says.

About the Author

Debbie Carlson has focused on commodities for much of her writing career. She spent more than a decade at Dow Jones covering the Chicago-based futures exchanges. As a Dow Jones editor, she worked closely with The Wall Street Journal and Barron's in planning commodities coverage.

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  1. By The New Normal? Hothouse on Jan 28, 2013 at 9:32 am

    [...] in the places I know well. The media has discussed how the Midwest, which according to the U.S. Department of Agriculture grew 85% of our corn and 81% of our soybeans last year, may struggle to keep up its output of crops [...]