Historic 2012 Drought

August 29, 2012

What does the country's worst drought of the last 50 years mean to consumers in terms of what they’ll be paying at the supermarket for commodities products?

This article originally appeared on Food, Nutrition & Science.

When Congress didn’t pass the new farm bill this year before taking their recess, they probably could not have known that the severe hot and dry weather that followed would turn into the worst drought of the last 50 years to hit American farmers and ranchers across the Corn Belt and Great Plains states, including South Dakota, North Dakota, Nebraska, Kansas Minnesota, Iowa, Illinois, Wisconsin, Indiana, Michigan and Ohio. Western and southern states are affected as well.

Field corn, grown for livestock, ethanol, and other uses, has been hit particularly hard, as the drought hit the region when corn was passing through its critical pollination state. Yet there may still hope for soybeans, which mature later in the season.

The USDA is assisting producers facing extreme drought conditions with nearly $16 million in financial and technical assistance for crop and livestock producers in 19 states. An additional $14 million will be transferred to the Emergency Conservation Program and can be used to move water to livestock in need, provide emergency forage and rehabilitate lands.

But what does all this mean to consumers in terms of what they’ll be paying at the supermarket for commodities products? Commodity prices are actually just one of the many factors affecting food prices, and they make up about 14% of the average retail food purchase. Therefore, according to the USDA, if the price of all commodities doubled, retail food prices would go up about 14%. Historically, food price inflation has hovered around 3% since 2004. Prices this year will most likely stay close to that number, while prices in 2013 will likely go up just slightly – even in light of the drought. 

The drought of 2012 is the most serious drought to hit U.S. agriculture since 1988, but a lot has changed since then to place the economy in a better recovery position in the case of natural disaster, says the National Corn Growers Association (NCGA). There have been improvements in agronomic practices, for example, including planting earlier, using conservation tillage that leaves more plants on the ground to help absorb water, and a dramatic reduction in row cultivation for weed control. In addition, there has been increasing corn acreage planted. Fortunately, says NCGA, back in the spring, corn farmers responded to market signals by planting more acres.

Seed companies have made significant improvements in base genetics as well, selecting for increased drought tolerance. Coupled with this is the increase in biotechnology that provides plants with healthier root stands, improving water uptake.

“There will continue to be advances made in natural drought hardiness in base genetics. In addition, each of the major technology companies are working on biotech drought resistance. The first generation of drought-resistant seeds is scheduled for broad commercialization in the next few years,” adds NCGA.

Also positive is the fact that farm income grew 147% since 1988, while farm output doubled. We now produce 30% more soybeans and 38% more corn. And the Federal Crop Insurance Program now covers 265 million acres versus the 14 million covered in 1988.

However, there are a lot of small farmers and specialty crop farmers that don’t qualify for farm insurance. And livestock farmers, who rely on corn for their feed, saw their insurance and emergency drought aid expire last year. Many of these farmers that sell their products at farmers’ markets and many family farms may have to get out of the business, if they can’t afford to recover.

Whether or not the federal law mandating the use of 13.2 billion gallons of biofuels (such as ethanol) this year will be waived in the wake of the drought remains to be seen. Several U.S. Senators and House members have signed letters asking the EPA to suspend or lower such mandates for this year and next. The 2007 law is designed to reduce U.S. reliance on foreign fuels.

“We know the U.S. Environmental Protection Agency is under a lot of pressure to take action. We hope it will consider all the impacts before making a decision. We will know a lot more about the corn supply as we are deeper into the harvest this year, and there is flexibility in the ethanol industry to ensure less corn is used for ethanol without needing to resort to a waiver,” says NCGA.

While the overall impact of the drought is starting to decline, having likely reached its peak, the long lasting effects may not be fully known until the next harvest. The National Corn Growers Association anticipates another year of at least 95 million acres or more being planted. The current corn-to-soybean price ratio does not favor a dramatic shift away from corn in favor of soybeans. Seed availability could present a challenge to planting more than 95 million acres. 

“Extensive use of crop insurance will temper this drought's impact on farmers. Although most growers don't buy up to the maximum allowed level of 85% coverage, with the average probably closer to 75%, crop insurance payments will help protect balance sheets from a devastating blow,” adds NCGA.

Corn is the biggest U.S. crop, valued at $76.5 billion in 2011, followed by soybeans at $35.8 billion, says the National Agricultural Statistics Service. Futures prices for both are up (60% for corn and 24% for soybeans) since mid-June.

Click here to see a regularly updated drought map: http://droughtmonitor.unl.edu/monitor.html.