Good Dirt Gone Dry Wilting Corn Crop As Food Costs Rally

By Tony C. Dreibus and Elizabeth Campbell - Jul 17, 2012
Bloomberg
Tom Flora walked into one of his corn fields in Delphi, Indiana, last week to survey land that until last month he expected would yield a bigger-than-average harvest. Eight rows in, he declared the crop a total loss.

“I’ve never seen this,” 63-year-old Flora said as he fingered the wilted brown leaves on a four-foot corn stalk that was half the normal height for this time of year and had cobs almost devoid of kernels. “This is good dirt here, but not this year. It’s too dry. I doubt this will produce anything.”

The worst Midwest drought since 1988 is baking farms from Arkansas to Ohio and threatening corn output that the U.S. said last week will be the second-largest ever. The price of the grain used in food for people and livestock is surging at a time when retail-meat costs already are near record highs. Global food prices are poised to rebound from a 21-month low in June because of weaker-than-expected supply in the U.S., the world’s largest corn exporter, the United Nations said July 5.

With forecasters including AccuWeather Inc. predicting worsening conditions in the next month, corn traded in Chicago surged by $2.7875 a bushel since mid-June, or 55 percent. The rally is adding to pressure on the livestock industry because cattle feedlots are already losing as much as $200 an animal.

Sanderson Farms Inc. (SAFM), the third-largest U.S. poultry producer, said every 10-cent corn increase boosts costs by $2.21 million.

Corn advanced 24 percent this month to $7.8475 on the Chicago Board of Trade, the most among 24 commodities in the Standard & Poor’s GSCI Spot Index, which rose 5.6 percent. The MSCI All-Country World Index of equities fell 0.6 percent and the U.S. Dollar Index gained 1.7 percent. Treasuries returned 1.1 percent, a Bank of America Corp. index shows.

Forecasts Raised

Goldman Sachs Group Inc. and Barclays Plc raised price forecasts by as much as 18 percent last week and Citigroup Inc. said July 11 the grain may reach a record $8. The bull market will persist for several months, Rabobank International analysts led by London-based Luke Chandler said in a report July 11.

“We went from feeling like we were on top of the world with the best crop ever, to the worst ever,” said Michael Wagler, 30, who farms several thousand acres in southern Indiana near Montgomery with his father Dale and his brother Lynford. “It looked really good through May and two weeks into June, and then we got 105-degree temperatures for 10 days, and that’s when everything went backwards.”

Conditions Worsened

About 63 percent of the Midwest had moderate to extreme drought as of July 10, the highest since the government-funded U.S. Drought Monitor in Lincoln, Nebraska, began tracking the data in 2000. The U.S. Department of Agriculture cut its output forecast by 12 percent on July 11 after predicting a record harvest last month. The USDA estimated 38 percent of the crop was in poor or very poor condition as of July 15, the most for that date since 1988 and up from 3 percent on May 18.

Most of Indiana, the fifth-largest U.S. corn grower, got less than 50 percent of normal rainfall in the past three months, with some areas below 5 percent, High Plains Regional Climate Center data show. Wagler is plowing under 25 percent of his corn fields to plant soybeans, which need ample moisture this month and a delayed start to the season’s first frost to result in a profitable harvest. While the strategy has worked before, “it’s a long shot,” he said.

Damaged crops may not mean losses for growers as crop insurance helps preserve farm income that the USDA predicted in February would be $91.7 billion this year, the second-highest ever behind the record of $98.1 billion in 2011.

Crop Insurance

Federal crop-insurance programs covered 265.7 million acres in 2011, and companies including Wells Fargo & Co. and Ace Ltd. paid out more than $10.8 billion last year, double the $4.25 billion in 2010, after drought on the Great Plains, Mississippi River floods and frosts in the South.

This year, insurers will see “the largest claim that they’ve probably ever had,” said John Cory, the chief executive officer of Prairie Mills Products LLC, a grain processor in Rochester, Indiana.

Even with the drought, farmers are expected to boost corn output by 5 percent this year to 12.97 billion bushels, second only to the record in 2010, after planting the most acres since 1937, the USDA said July 11. The higher output will help boost inventories before next year’s harvest by 31 percent from a 16- year low on Sept. 1 of 903 million bushels, the USDA said.

Rising feed costs are reducing livestock supplies. Beef production will drop 2.4 percent to 24.656 billion pounds next year, the lowest since 1993, and the U.S. cattle herd on Jan. 1 was the smallest since 1952, USDA data show. The agency cut its forecast for poultry output on July 12 by 1.1 percent from its June estimate, to 43.07 billion pounds.

Meat Record

“It’s a bigger picture than: Woe is the farmer because he has a drought,” said Wes Stockdale, whose family has been farming in Indiana for 150 years. “Soon, it’s going to be: Woe is the consumer. There’ll be food on the shelves, but it’s going to cost more.”

Retail ground-beef in the U.S. averaged $3.016 a pound in March, the highest since at least 1984, according to the Bureau of Labor Statistics. Grocers sold whole chickens at a record $1.401 a pound on average in April, and bone-in breasts rose 12 percent this year, government data show. The Iowa Corn Growers Association estimates one bushel of the grain converts to 5.6 pounds of retail beef.

An index of 55 food items tracked by the UN’s Rome-based FAO may advance through to September or October as the grain rally boosts prices for oilseeds and cereal products, Abdolreza Abbassian, an FAO economist, said July 5. The gauge fell 15 percent since reaching a record in February 2011.

Cash Costs

Sanderson Farms, based in Laurel, Mississippi, told analysts during a presentation last month that it used 22.1 million bushels of corn in the three months through April 30.

While the company is using mostly cheaper inventories to feed its flocks now, costs probably will start rising in September, during its fiscal fourth quarter, when Sanderson plans to expand output, Chief Financial Officer Mike Cockrell said in a telephone interview yesterday.

“Over time, the high price of grain leads to the higher price of chicken,” Cockrell said. “The industry has to have a margin and be profitable, so it will adjust production. When we get to the fall and we’re facing higher grain costs, chicken prices will have to move accordingly.”

‘Desert’ Ranch

Feed costs will be 50 percent higher for Steve Foglesong, 55, who raises 9,000 head of cattle and farms 1,800 acres of corn and soybeans about 65 miles southwest of Peoria, Illinois. Soybean-meal futures advanced 49 percent to record this year in Chicago trading. Foglesong said he may chop down his corn fields and feed the crop to his herd.

“These pastures are bone dry,” Foglesong said by telephone. “They are like a desert.”

In Texas, the biggest U.S. cattle producer, the grain rally is adding to the financial damage from a 2011 drought that was the worst in at least a century and forced ranchers to cull herds. The state’s losses reached $7.62 billion last year, including $3.23 billion for livestock producers, according to Texas A&M University’s AgriLife Extension in College Station.

Most feedlots are losing $150 to $200 per animal sold for slaughter, said Lonnie Busch, a 44-year-old who runs a feed yard owned by Cargill Inc. in Leoti, Kansas. Feedlots buy year-old animals that weigh 500 pounds (227 kilograms) to 800 pounds, fattening them on corn for four or five months until they weigh about 1,200 pounds.

‘Irreversible Damage’

Drought conditions in the southwestern half of the Corn Belt, which runs through the Midwest and stretches from the eastern Dakotas through Ohio and Michigan, are going to get worse, after causing “irreversible damage” to some crops, according to AccuWeather. At least 50 percent of the region will have below-normal rainfall and above normal temperatures in the next 30 days, said Dale Mohler, an AccuWeather meteorologist.

“You need an inch of rain a week to get a good crop, and you’re going to be getting half an inch or less most weeks through mid-August” in the southwestern part of the Corn Belt, Mohler said by telephone from State College, Pennsylvania.

On the 2,900 acres he farms in Indiana, Flora said he will probably make claims on his crop insurance that will pay about 85 percent of a historical yield on the land.

Before the drought, Flora bought a 560-horsepower Deere & Co. (DE) 9630 tractor that cost him $360,000. “I would cancel out, but they have my old tractor resold in Illinois,” he said. “If not for that, I would think about backing out because cash flow is going to be hurting pretty bad this year.”

Tractor Sales

Randy Allen, the store manager at the Wright Implement, a distributor of Deere farm equipment in Crawfordsville, Indiana, said he’s already seeing a decrease in sales. A new planter can cost $300,000, while a combine fetches as much as $500,000 and a tractor is priced at about $200,000, Allen said.

Less than 5 percent of normal rains fell in the past month on ground farmed by 60-year-old David Adcock near Atwood, Illinois. The lack of moisture probably will cut the farm’s yields in half to about 100 bushels an acre, said his son John.

“There was a point in time we had a potential for a world record corn crop if we had the rains,” David Adcock said in an interview at his farm. “We’re scraping on the bottom of the bin already. It’s going to be a big, big deal.”