'No rain, no grain — some pain': Analysts

by Bryan Salvage
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KANSAS CITY, Mo. – In sizing up the impact of the ongoing US drought on farmers, protein producers, consumers and agriculture investors during a BMO media teleconference held during the morning of Aug. 8, Sam Miller, managing director and group head, agriculture, BMO Harris Bank, said, “I would address the current drought situation as ‘No rain, no grain — some pain.’”

Although grain producers are going to experience reduced yields, a significant number of acres are covered by crop insurance, “which is the good thing,” he said. Miller added livestock producers will have a much larger hill to climb. “They will be searching high and low for feed,” he said. “They’re now culling herds to reduce their feed needs and to improve productivity. Production has been harmed by the extreme heat, particularly for dairy and rate of gain for hogs and cattle.”

Some animal reproduction challenges could be experienced Miller warned. “[Meat animal reproduction] typically falls off during excessive heat and this may cause a ripple affect later in production,” he added. “The jury is still out on that front.”

Equipment and supply providers, buyers and the rural economy will also feel the drought’s impact as farmers hold back on purchases until they revise their forecasts and know where they stand, Miller continued. “USDA is going to issue a revised report this Friday [Aug. 10],” Miller said. “Many industry analysts are already out with their estimates and are anticipating further declines in the adjusted production and yield for US crops.”

With regards to this year’s crops and outlooks, a number of factors are going to impact yield. “The soil type has had a very big impact,” Miller said. “The better the quality of soil, the better the crops look. Compaction is an issue. So where there are compaction issues, the crops [are] more stressed. Corn-on-corn plantings are seeing lower yield expectations than corn-on-soybeans. Planting date has had a big impact. The further south you get in the US Corn Belt, the earlier-planted crops look better than the later-planted crops because they hit pollination before some of the extreme temperatures hit. In the northern Corn Belt, later-planted crops are faring better because they caught some beneficial rains in mid-July.”

Genetics has had an impact on the corn crop. “Our producers have said that genetics have helped to keep plants alive, but that hasn’t necessarily unlocked the key to pollination,” Miller said. “There are some areas that have experienced beneficial rainfalls but it has been very spotty across the Corn Belt. Producers predict this year’s harvest will be early.”

Livestock producers are actively talking to their bankers as they search to purchase feedstock for next year and are looking for funds in order to purchase this feedstock, he added. “There is a greater interest in price-risk management to increase price certainty for sales of milk, pork and beef, as well as the ability to lock in feed costs and an overall margin,” Miller pointed out.

The US drought has transcended the Canada-US border, said David Rinneard, national manager, agriculture, BMO Bank of Montreal. With few exceptions, the 2012 drought has left much of Ontario’s land at record dry status and the driest it has been in 47 years, he added. US drought has had an effect on Canadian commodity prices, helping to raise them to record or near-record levels.

“The last time Ontario crops were equally parched was in 1965,” he continued. “Nearly six straight years of favorable financial performance led up to 2012 and [what is being experienced now due to the drought] was not the conclusion Ontario grain farmers were looking for.”

“Regardless of the commodity prices, if a farmer’s yield is zero, his return is still zero — and in many instances it’s negative,” Rinneard said. “Remember, the farmers, unlike other businesses, incur their year’s input costs early in the year before there is any indication of what the crop will be worth or the revenue it will yield.”

This affects Canada’s livestock producers. “The high cost of feed for their animals is going to squeeze what are already very thin margins,” Rinneard said. “They feel this squeeze on three fronts. The cost of grain going into feedstuffs has risen considerably and they are consuming gross margins. But for livestock producers, the largest effect is likely to come from the seldom-discussed and less apparent restrictions the drought is having on North American hay production.

“Large components of grass and hayfields are demonstrating the same performance many lawns are —quite simply, they’re scorched,” he said. “This creates a shortage and causes hay prices in many markets to double and triple from their traditional norms.

“The third affect livestock producers face, particularly cattle farmers, is the high prices on hay and comparable forage crops in some instances could force them to liquidate their herds,” he continued. “When this happens, the market has been inundated with supply; this forces cattle prices down, totally undermining any hopes of prosperity in 2012 and in some cases leaving producers in a rut for next year.”

There is a real fear developing that this year’s drought is going to leave permanent damage on farm incomes, said Don Coxe, Strategy Advisor, BMO Financial Group, and advisor, Coxe Global Agribusiness Income Fund. Farmers are being told by “climate scientists” this drought is a sign of global warming and more troubles like this will come, he added. So, they’re not buying farm machinery as originally anticipated they would.

“This is really the third time in five years we’ve had high-selling grain prices,” Coxe said. “The notion is sinking in on global planners that maybe we are closer to the edge globally than we thought. We’re going into next year with such a low [grain] level and high global demand. We’ve added roughly 400 million people in the world, including people with high-protein diets, since the beginning of this millennium. We haven’t been able to add the hectares under cultivation or increase yields enough.”

What kind of governmental policies will come from this situation, Coxe asked? “We hoped they would do something in the US to prevent the use of more than 40 percent of the corn crop for ethanol, but there’s not a chance that will happen,” he added. “President Obama has been a long-time backer of that as a renewable [fuel]. That means we’re going to be closer to 45-50 percent of the US corn crop going into producing ethanol.”

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