A wide range of potential yields & profits
One hundred thirty-five or 165? Those are the extremes of projected U.S. corn yield in a recent report showing the range of potential profit for grain farmers in the Midwest whose crops have fallen victim to drought stress.
Say the dryness continues a while, then unfolds into a more seasonable trend with more "normal" rainfall for the remainder of the summer. That would likely put the average corn price at $5.80/bushel, according to University of Illinois Extension ag economist Gary Schnitkey.
"The mild drought scenario represents continuing dry weather, but eventually a return to more normal weather that includes some rains during the growing season. Net income under this scenario is forecast at $219,900; above the income given winter expectations," he says. "While yields under the mild drought case are lower than winter expectations, higher prices offset yield declines."
Now, ratchet up the drought stress to the "moderate" level, resulting in an average yield closer to 150 bushels/acre. That would mean an average corn price of around $6.20/bushel, with soybeans around $14.50/bushel, Schnitkey says.
"Net income is projected at $190,400, below the income projected for the mild drought and above the income given winter expectations," Schnitkey says of the "moderate" drought category.
Now, take the drought to the "severe" category, leading to an average corn yield of 135 bushels/acre and 40 bushels/acre for soybeans. That's when prices really spike, with corn at $7.50/bushel and soybeans at $17.25/bushel, Schnitkey says.
"Given these prices, income under a severe drought is projected at $292,100, up considerably from winter expectations. Crop insurance payments are occurring under this scenario," he adds. "As a result, further yield declines would not have much of an impact on incomes because lower crop revenue is offset by higher crop insurance proceeds."
These scenarios could unfold barring a few specific caveats, namely whether or not a farm is covered by crop insurance or the farmer's hedged a large portion of the new crop. Looking longer-term, though, Schnitkey says if this year's crop ends up on the lower end of the projected yield spectrum, the ripple effect could last well into the 2013 marketing year.
"This could then lead to 2013 price expectations above long-run levels and higher than would be the case had trend-line yields occurred in 2012. This conclusion, however, is based on the assumption that no long-run reductions in consumption occur, which could be the case if very high prices occur in 2012. Reduced consumption would then result in lower incomes in 2012 than presented above," he says. "It could also lead to lower grain farm incomes in future years."