July 30, 2012 7:28 pm

US drought: Stuck on dry land

The heatwave that has pushed corn prices to record highs threatens a new food crisis
Drought has robbed farmers of critical water sources©Getty

Cracking up: drought has robbed farmers of critical water sources, such as this pond in Illinois that is normally used by cattle for drinking

A tractor and a chopping machine circle a corn field, pulverising the ruined stalks and spitting them into a grain wagon. By day’s end only a 10-foot wide strip will be saved for the insurance adjuster.

This land, in Farmington, Missouri, normally yields 130 bushels an acre when harvested in the autumn. Not this year, when the dried out crop is fit only for being turned into silage.

“The handful of ears that are out there don’t have grain on them,” says Richard Detring, a farmer, before returning to his grim work inside the air-conditioned tractor. A thermometer reads 106F (41C).

Disappointments such as Mr Detring’s are taking place around the US corn belt as crops have been weakened by relentless heat and the worst drought in half a century. Analysts have torn up predictions of a record US harvest. Now they are focusing on which consumers, from pig farmers to ethanol refiners, will capitulate first and use less grain. Futures markets have concentrated consumers’ minds: prices for corn, soyabeans, soyameal and rapeseed have exploded to record highs.

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IN Analysis

The third food commodities price spike in five years highlights how problems in one corner of the world quickly become a global concern. The US leads the world in agricultural commodity exports; countries and regions as diverse as China, Europe, Egypt and Mexico depend on imports of grain from the boundless fields of states such as Iowa, Illinois, Indiana, Ohio and Missouri. Government officials fret that a further surge could induce panic buying by importers or export restrictions in the world’s breadbaskets, turning an episode of high prices into a crisis. While restrictions are unlikely in the US – Russia’s export ban on cereals in 2010, when it halted cereals shipments amid its worst drought in a century, still haunts commodity markets.

The impact of a looming crop shortfall in the US, the country with the best seed technology, first-class export infrastructure, the deepest commodity futures markets and plenty of capital available to farmers, also raises unsettling questions about how food supplies will keep pace with a growing population and a warming climate.

“When something happens in the US like what is happening today, it has a huge impact on world prices,” says Maximo Torero of the International Food Policy Research Institute in Washington.

US farmers last year grew 35 per cent of the world’s corn and soyabean crop, and exported 40 per cent of these staples traded on the world market. The most productive farms are in the Midwest. Or they normally are.

The US categorises almost half of its corn crop as poor or very poor, the worst rating at this point in the season since a severe drought in 1988. More than a third of the soyabean crop had the same rating. Nine in 10 acres of corn and soyabean crops are on land suffering drought, the US Department of Agriculture says.

Falling yields and the climate change question

On the Interstate 55 highway, south of Cape Girardeau, Missouri, a billboard towers above the speeding traffic. “300 bushel corn?” it asks.

The advertisement entices farmers with the prospect of producing 300 bushels per acre. This would be an exceptionally bountiful harvest in most of the country, even with perfect weather. With this year’s drought, it seems like a cruel joke.

Rising yields have played a critical part in America’s agricultural success story – proof, it would seem, of the benefits of using fertiliser, expensive machinery and new seed varieties. But recent weather patterns have brought unexpected plot twists.

Since 1970, average US corn yields have doubled, enabling the country to feed a growing world population with a mounting hunger for meat as well as its own burgeoning ethanol industry.

But yields peaked at 164.7 bushels an acre in 2009. This year, some analysts are eyeing a 122 bushel harvest, a level last reported in the 1990s. Lower yields in the US have raised prices and led to aggressive planting by rivals in countries such as Brazil and Ukraine.

Seedmakers and many analysts say that, despite the annual volatility, the upward trend in yields will continue. US-based Monsanto, one of the world’s biggest seedmakers, aims to double yields from year 2000 levels by 2030. “This would get us to the 200s, even 300, for corn in the US. We’re still committed to that goal,” says Monsanto’s David Fischhoff.

After an unusually warm and dry spring, US farmers this year planted earlier than usual in many places. They hoped this would enable stalks to survive the sensitive pollination phase before the worst of the summer heat. But the heat also came early and proved so intense that many plants did not even form kernels.

It might yet be too early to link the drought to the longer-term warming trend in the world’s climate. In much of the corn belt, spring and early summer precipitation has increased in recent decades. “Drought is a natural phenomenon,” says Brian Fuchs of the National Drought Mitigation Center.

Still, in a paper published this month, US Department of Agriculture economists write: “Agricultural production has always been affected by variability in weather and US farmers have adopted production practices and strategies appropriate to their local climate. The weather that shapes the structure of US agricultural production, however, is changing along with world climatic conditions.”

As recently as mid-June, USDA forecasters estimated farmers who had rushed to sow corn during an extremely warm spring would average 166 bushels on each acre, lifting total US production to a record 14.8bn bushels. In Chicago’s futures market, corn was trading at an 18 month low below $6 a bushel.

“Most of the corn belt two months ago was fine,” says Brian Fuchs, climatologist at the National Drought Mitigation Center in Nebraska state.

Then, seemingly out of nowhere, prolonged blasts of heat hit emerging stalks and plants. Corn has surged 41 per cent since mid-June to a record above $8 a bushel; soyabeans have soared 25 per cent in the same period to almost $18.

US corn and soyabeans are mainly consumed by livestock, and the processed foods and biofuels industries. Their journey to a dinner plate is usually through a factory or the digestive system of a cow, pig or chicken. As any farmer can explain, people do not eat hard cobs of yellow “field corn”.

Rice and wheat, which are boiled or baked directly into staple foods, do not share the same dire supply situation. But economists say the devastation in US corn and soyabean crops will nonetheless affect these markets.

There are several reasons for this, says Abdolreza Abbassian, senior economist at the UN Food and Agriculture Organisation in Rome. First, he says, as US corn prices surge, chicken and pig farmers in Asia may feed animals more wheat instead. This increases demand.

The next effect takes hold more slowly but takes longer to reverse. As corn and soyabean prices rise, farmers plant more acreage with these crops the following season. This past spring, US farmers gave more land to corn and soyabeans but took it away from wheat. “You intensify competition for crops,” says Mr Abbassian.

Bunge, a top global agricultural trading house, expects “massive planting” of corn and soyabeans in South America later this year.

Wheat prices have also risen 50 per cent since mid-June. Traders and officials are especially nervous that domestic food inflation could pressure governments in grain surplus countries to limit exports. The Russian export ban caused the greatest shock two years ago sending wheat prices soaring. Moscow has said there are no grounds for limiting exports but traders are beginning to speculate about export taxes or even another ban.

Alberto Weisser, chief executive of Bunge, which has port facilities on the Black Sea, says: “The Russian government heard the last time around how negative that measure was ... They are going to be much more careful.”

. . .

High prices hit grain importers especially hard. As the Arab uprisings began to spread last year, countries from Algeria to Saudi Arabia stepped up wheat purchases. As of now at least, Mr Weisser says: “We don’t hear of any panic buying.”

After declining in the past three months, the FAO Food Price Index will probably jump when it is updated next week. Food inflation fears are building in emerging markets.

Inside the US, retail food prices do not rise at the same pace as commodity prices. Food manufacturers generally choose to sacrifice profit margins or swap cheap ingredients for more expensive ones when their commodity costs jump. The USDA forecasts US consumer food price inflation will accelerate to 3-4 per cent next year. Still, it kept its 2012 outlook stable as it will take months for the drought to take its toll at the supermarket.

More immediate shocks from the drought are already being felt in the US livestock business – the source of the 44bn pounds of red meat Americans will eat this year and the 8bn pounds they will sell abroad.

In Missouri, which boasts 57 cattle per square mile, the drought has ruined the grass that calves traditionally graze before they are sold for fattening on feedlots. Farmers are feeding winter hay stockpiles in summertime to keep animals alive, in some cases paying more to transport a bale than what it is worth.

Cattlemen out of hay are increasingly turning up in sales barns such as the Farmington Livestock Market – an amphitheatre-shaped room with torn seats and cigarette smoke – where cows, bulls, goats and even a pair of llamas were prodded and paraded across a sawdust floor to be auctioned last week. Ben Davis of FCS Financial, a Missouri lender, says cattlemen are accepting $900 for cows that would have cost $1,500 a few months ago.

Interactive graphic: US drought

Cornfield

View the effects of the extreme drought faced in the US heartland in our interactive graphic.

“They got no grass. They got no hay. They got no water,” says Lloyd King, a cattle transporter.

Mr Detring sells his silage to Joe Crawford, a cattleman with pastures across a dry creek bed from his field. Mr Crawford says his land normally grows 600 round hay bales; this year it was 300. Even with the silage he still does not know how he will feed his 100-strong herd.

“The sales barns are full,” he says. “They don’t have a choice.”

A similarly subdued mood enveloped last week’s annual Illinois meeting of pig farmers under contract to the Maschhoffs, a family-owned company that sells 4m pigs a year to slaughterhouse operators such as Cargill and JBS Swift.

“When you’ve got a cost structure that is built around $5 corn and it goes to $8, there’s only one way to deal with that. It’s reduce supply and raise the price of hogs,” says Jason Logsdon, Maschhoff chief executive.

The cull is boosting supplies to slaughterhouses, pressuring prices in the short term.

. . .

Unlike grains, in which farmers can adjust to market signals every year, it can take cattle farmers years to rebuild herds after they have sold off breeding cows normally owned for a decade or more. Spared animals are having difficulty reproducing. “Bulls don’t breed in 105-degree weather,” says Matt Hardecke, who raises cattle in Steelville, Missouri.

The US, dominant in grain exports, has a smaller share of the international market for meats and in fact imports almost as much beef as it exports. Emerging market consumers with rising incomes are eating more animal protein fed domestically with US grain and soyabeans, propping up demand for crops from the corn belt.

Another key consumer of corn once seen as voracious – the US ethanol industry – has begun to retreat. Production fell to the lowest level since late 2009 despite a government mandate requiring 13bn gallons to be blended with motor fuel.

The animal feed industry is nonetheless pressuring Washington to declare an emergency suspension. “We’re not anti-ethanol. We’re pro-ethanol. But let the market dictate usage of ethanol. There is no mandate that any retailer sell ‘X’ pounds of pork,” says Mr Logsdon.

Ethanol policy is one of several sensitive political dimensions to the drought in an election year. The Obama administration has declared 1,200 counties drought disaster areas, making farmers eligible for low-interest loans. The administration has allowed farmers to mow hay or graze cattle on some pastures that were set aside for conservation.

The drought has also struck in the middle of debates on the US Farm Bill, legislation that sets out farm policies and subsidies. The Senate had eliminated a $5bn annual subsidy, which is awarded to farmers regardless of whether they planted a crop, but the House has proposed a one-year extension.

Corn and soyabean prices hovered at record levels this week as rains sprinkled parts of the Midwest. Precipitation may be a blessing for soyabeans but for many corn fields rain will be worthless. The extreme heat made it nearly impossible for blowing pollen to fill ears.

“It didn’t stand a chance,” Mr Detring says.

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