How bad is the 2012 drought? "This is the biggest catastrophe I have seen in my career," says Dan Basse, president of AgResource Co., a commodity research firm in Chicago.
Basse didn't mince words as he spoke to a group of farmers at the Wyffels Corn Strategies meeting in Litchfield, Ill., this week. "I wasn't around in 1936 when my grandfather said it was pretty bad, but this is pretty bad," he says. "I see corn yields that look like '88, and we're still declining. If it continues we could be looking at 115 bu. per acre, and two or three more dry weeks, it could happen."
As a result, says Basse, "We, as a company, have been talking about the possibility of $9 or $10 per bushel corn prices," he says. "And I can't rule out $20 beans."
Some Illinois and Indiana farmers have already given up, plowing fields and contacting crop insurance adjusters. Kelly Robertson, who farms in southern Illinois, says planting conditions were ideal back in April, but rains and heat quickly took their toll. "We had a half inch of rain in April, around four-tenths in May and a quarter inch of rain in June," he says. "We're about 12 inches of rain behind normal for the growing season."
Robertson's corn crop in early July was about one third as tall as normal. "I have fields that will have zero yields, and one or two fields that might make 100 bushel per acre," he says. "I expect to see a whole farm average of 40 bpa, which will be the worst average in our history."
Meteorologists are already talking about dry weather continuing through winter, says Basse. "Short of a tropical storm, average moisture isn't going to get us through. This is a catastrophe and we don't yet know the full extent of the damage."
Weird world weather
It's been a strange year for world weather. Global temperatures have been record highs through June. NOAH's extended forecast shows no relief for the next 30 to 60 days. AccuWeather.com reports the summer of 2012 is in the running for one of the top three hottest summers in the past 60 years in the United States and southern Canada.
Remember the South American drought six months ago? Historically this is the first time we have had a Latin American drought followed by a North American drought in the same year, Basse says. Russia, the world's third largest wheat exporter, is suffering yet another drought; worried over rising domestic prices it is certainly considering another ban on wheat exports. India is impacted by a monsoon pattern. World grain area and production is showing a loss of 70 million metric tons; possibly more if U.S. corn production continues to drop. "Both world corn and wheat yields are both expected to decline this year," says Basse. "That's extremely rare."
While world grain production is forecast down, demand is not coming down at the same levels. Global grain demand has been growing for 9 consecutive years. Starting in 2005, the combination of rising caloric demand and biofuels started the bull market we still see today. The dollar has trended down since 1985, making our exports more attractive to world buyers. Expect to see more food riots and another heated debate about using corn for fuel.
Meanwhile global corn and wheat stocks are the lowest since 2008, notes Basse. They're headed in that dangerous direction where we could see the return of food riots – the same kind that toppled governments four years ago.
Crop insurance focal point
About 75% of farmers have Revenue Protection Multiperil crop insurance. That number has grown significantly in the past ten years. Taking crop insurance is a business decision and the underlying intent is to reduce the chances of government disaster bailouts.
Even so, crop insurance is getting scrutiny in the debate over a new farm bill. The current law expires at the end of September. Multiperil crop insurance is sold and serviced through private insurance companies. A portion of the premium, as well as the expenses of the private companies, is subsidized by the federal government. Taxpayers picked up $7.4 billion of last year’s $11.9 billion national cost.
It's a sore point among those who want less tax money spent on agriculture. This year's severe drought could make federal costs zoom to $30 billion, three times more than last year, says Iowa State economist Bruce Babcock.
Even so, Kansas State University economist Art Barnaby says the crop insurance industry has had only three loss years in the past 20. Those were in 1993, 2002, and this year.
Barnaby expects this year's national average corn yield to continue to fall well below the current 146 bpa estimated by USDA.