DUBUQUE, Iowa — Rain is key to where prices are headed in the coming year, says Chad Hart, Iowa State University Extension grain marketing economist.
Speaking at the recent Tri-State Ag Lenders Seminar in Dubuque, Hart outlined how the drought is affecting the feed market.
"We have some feed issues, and they’re going to linger," Hart said. "It’s not just a corn problem or a soybean problem. This is an overall feed problem. Whether I’m looking at corn, soybean meal or hay, I’m looking at short supplies and higher prices."
USDA has projected the 2012 corn yield at 122 bushels per acre, down 25 bushels from 2011 which was down from 2010.
"Farmers planted 96 million acres of corn, the most corn since 1937, and with anything even close to trend-line yields we would have seen corn prices in the $4s," Hart said. "Instead USDA is projecting a 2012 season average corn price of $7.80 per bushel which is a record by over $1.50. It makes the 2012 corn crop the most valuable crop ever produced even though it’s only the eighth largest."
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As farmers look to next year, potential exists for a bin-buster crop.
"But it will take a heck of a lot of help from Mother Nature to get us there," he said.
The 2012 crop produced 10.7 billion bushels while demand is forecast at 11.15 billion.
"We’re seeing cuts due to high prices in the livestock, ethanol and export sectors," Hart said. "Everybody is having to cutback because they’re staring at record high prices due to the drought."
It’s a similar tale for beans. The drought cut yield to 37.8 bushels with U.S. production estimated at 2.86 billion bushels. USDA’s season average price for 2012 is $15.25.
Hart is watching how international demand holds up for soybeans where the major growth sector has been exports, mainly to China. Sixty percent of U.S. soybean exports go to China, and that demand continues today.
"We’re not only staring at short crops due to the drought," Hart said. "We’re also staring at a lot of demand for those crops even with high prices."
When the drought kicked in in June, markets reacted immediately with corn prices jumping from $5 to $7.50. Beans went from $12 up to $16.
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"The market is still trying to ration demand today," Hart said. "We’ve come off those highs a little bit because our crop has been a little better than expected. Can we expect more price moderation? Probably not. The market seems to have found this soft spot with nearby corn in the $7 to $7.60 range and beans in the $14 range."
USDA estimates 2012 corn production was down 19 percent in Iowa, 38 percent in Illinois and 32 percent in Indiana. Minnesota production was up 8 percent.
Even with late-season rain, soybean production was down 17 percent in Iowa while it increased 10 percent from a year ago in Minnesota. South Dakota and Nebraska bean yields dropped 24 percent. Illinois and Missouri were down 18 percent, and North Dakota was up 18 percent.
While world corn production is forecast to go up in many countries, the United States is the world’s largest producer of corn and usually beans so a U.S. drought is felt by countries around the world, Hart said.
South American countries are gearing up to help meet soybean demand, but it will be six months before their crop impacts markets.
The U.S. meat sector is shrinking due to high feed costs. Demand from export markets is off, and with margins squeezing the ethanol industry, four plants remain shut down, and most others have slowed production.
Corn futures are flat at $6.91 up until mid-summer when they drop off by nearly $1 and then remain relatively flat until October 2014 when they drop off another 30 cents to $5.65.
Bean futures are flat at $14.71 into winter and start to slide in the spring when South America’s crop affects the market. Futures prices remain flat at $12.76 from fall 2013 to fall 2014 when they drop to $12.37.
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The seasonal drought index shows that soils will not completely recharge by 2013.
"The 2012 crop sucked all the moisture out of the soil," Hart said.
Hart told lenders to advise livestock clients to use risk management to lock in market opportunities to get better breakevens.
"For crop producers, crop insurance is the saving grace," Hart said. "It’s the livestock industry that faces the worst hardships. For livestock producers, risk management and how you take care of the financial side of your farm are key to surviving this storm."
