Shrunken Crops Stir Long-term Concern

More than just yields will be affected by drought of 2012. Everyone will have crucial, and sometimes painful, decisions to make.

The Iowa State Fair marks the time each August when you start to see a clearer picture of the size of the upcoming corn harvest, and can count pods on soybean plants. Farmers I visited with at the fair this past week were talking about the longer-term impact of smaller crops, tighter supplies and higher prices. The drought that's clobbered Iowa and the Corn Belt this summer ranks among the most severe in 140 years of weather records.

USDA's first official yield forecast is released in the agency's August Crop Report. This year's yield estimates were released August 10, the first Friday of the Iowa State Fair. USDA predicts the 2012 U.S. corn crop will be the smallest since 2006 with the lowest yield in 17 years. Iowa's corn crop is down 19% from 2011.

The government also is predicting corn prices as high as $8.90 a bushel, which could soften the financial hit for the farmers whose yields hold up. But higher corn prices will mean higher feed costs for hog, cattle and poultry farmers and ethanol producers and ultimately, higher food prices for consumers. The soybean crop nationally and in Iowa is predicted to take a hit, too, but timely rains in some areas in August could still make a difference for bean yields.

Expect a huge variation in yields this fall, both field-to-field and within fields

The drought's depth of impact on Iowa's economy will depend largely on whether Iowa farmers can achieve the 141 bushel-per-acre yield forecast by USDA, the lowest since 1997 and down from 172 bushels per acre a year ago. Farming is a major contributor to the state's economy, driving manufacturing that ranges from tractors and other equipment to grain processing, packing plants and other food production.

"This year's crop is really variable," observes Kevin Ross of Minden, president of the Iowa Corn Growers Association. "There are areas that look really good, and then nearby you see stretches that are terrible."

USDA is forecasting a 10.7 billion bushel corn crop this year for the U.S., down from 12.4 billion bushels harvested in 2011. "With a crop below 11 billion bushels the market has to do more rationing of supply, which means higher corn prices ahead," says Craig Hill, president of Iowa Farm Bureau and a Warren County farmer. "It'll take higher prices to get users to reduce corn use some more. We've already had a lot of price volatility this summer. That will continue. Users of corn are making difficult decisions, such as reducing their breeding herds."

Livestock farmers are culling breeding herds; ethanol plants cutting back, too

Livestock producers are already culling sows and cows and ethanol plants are cutting back production. "We have to look ahead at what's going to happen to grain prices in 2013 and 2014 in terms of demand," says Hill. "In response to higher corn and soybean meal prices this year, decisions are being made on the demand side that will have long-term effects. This is not a time to make hasty decisions. But some tough decisions will have to be made—especially by livestock farmers."

One person you want to spend some time with sooner rather than later is your grain buyer, he notes. That's especially true if you forward-contracted or used futures to price the 2012 crop. If you think you won't be able to deliver as many bushels as you contracted, you need to visit soon and discuss your options. Some buyers might be willing to roll contracts into 2013. Typically, if you're short on crop vs. what you contracted, you pay the difference between contracted and current price. Grain buyers may be willing to look at alternatives since they will need you as a future customer.

Responding to reduced yield forecasts and strong price outlook driven by USDA's August Crop Report, here are comments from ICGA leaders:

* "This is not my most challenging year for farming. In my 12 years, I've dealt with various issues getting started. Everyone will be tightening their belts and looking hard at risk management tools to improve their ability to handle the financial risks. I'm thankful that in years like this, we have better plant genetics. Also, we have strong crop insurance programs to reduce long-term effects of adverse weather such as drought. Certainly, if Congress would pass a new farm bill as soon as possible, that would also be helpful, especially to restore disaster provisions for livestock producers. Those provisions have already expired in the current 2008 Farm Bill." –Kevin Ross, ICGA president and farmer from Minden, Iowa

* "We live today in a global marketplace. We are experiencing now what other countries have faced in recent years. Every year, we have different weather that impacts different areas of the world. That's why I'm glad we are able to depend on a global market and it is working." –Deb Keller, Iowa Corn Promotion Board Chair and a farmer from Clarion, Iowa

* "I've had about 13 inches of rain this growing season, which isn't ideal, but seems to be lucky compared to other areas across the state. Even with that, our conditions continue to be variable within the same field. Minimal soil moisture, good conservation efforts and improved plant genetics, specifically root and stalk technology traits, have made this crop something that under the same conditions just 10 years ago wouldn't have been possible." –Bruce Rohwer, ICGA vice president and a farmer from Paullina, Iowa

* "In 1988, I saw similar corn browning early in the field. That was 25 years ago, so that makes it 25-to-1 odds on having good growing conditions. I'll take those odds any time and although we have to reprioritize things in our farming operations, I will be back growing corn again next year." –Dick Gallagher, ICPB past chair and a farmer from Washington, Iowa

Variability is the one common word from farmers this year. The USDA August forecast for yields is based on weather and crop conditions as of the first of August. Farmers also agree the full extent of the drought will not be realized until harvest. The next USDA update of the official yield forecasts will be released in its September 12 Crop Report.

Soybean prices will also continue to remain a hot ticket through harvest

Iowa Soybean Association leaders also say this year's drought with its effect on crop yields and the market consequences add up to uncharted territory for many farmers, as farming hasn't experienced a bad drought in the last couple of decades.

USDA is forecasting soybean production at 2.69 billion bushels for 2102, compared to 3.06 billion bushels harvested last year. The average soybean yield for the U.S. is now estimated at 36.1 bushels per acre. For Iowa, production is pegged at 405.9 million bushels, compared to 466.1 million in 2011. USDA estimates Iowa's average yield will be 43 bushels per acre, compared to 50.5 in 2011. ISA president Dean Coleman, farming near Humboldt, says, "We keep hoping to get enough rain to add bushels, but we are now getting to the point where this won't happen."

Noting the announcement of recent soybean export sales to China totaling more than 550,000 tons for September delivery (the beginning of the new marketing year) ISA director of market development, Grant Kimberley, says, "China continues to buy. I think it is going to take $20 per bushel soybeans to slow China down. Their first priority is to secure their food supplies." Kimberley, who in addition to his ISA job also farms with his dad near Maxwell in central Iowa, adds, "Iowa's soybean production this summer has hung in there pretty well, all things considered."
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