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Drought's silver lining

Agriculture.com Staff 11/16/2012 @ 2:14pm

This has been a rough year for producing a crop. Between frosts last spring and the drought over the summer, U.S. producers have been challenged. But some things actually do grow well in a drought: crop prices, for example.

As temperatures soared last summer, so did grain prices. Both corn and soybean crops achieved record-setting prices. At harvesttime, the markets were providing prices that will establish records for national average cash prices.

Since mid-July, the corn market has set prices at or above the $7-per-bushel range. Soybeans topped $14 per bushel at roughly the same time. With prices at such high levels, the 2012 corn and soybean crops will be the most valuable crops the U.S. has ever produced.

These record values arise not only from the lack of production due to drought and temperature extremes, but also from the strong demands that have built up for both crops over the last decade.

With ethanol demand leading the charge on the corn side and export demand driving the soybean market, both markets have grown and experienced relatively tight stock levels over the past few years. And that tightness in stocks meant there was (and is) very little cushion in case of a short crop.

Growing demand

Over the period from 2000 to 2005, the annual average corn demand was 10.2 billion bushels, and annual average soybean demand was 2.82 billion bushels.

Since 2006, those annual average demands have grown to 12.4 billion bushels for corn and 3.16 billion bushels for soybeans. That's a growth rate of 21% for corn and 12% for soybeans.

The growth in demand has set the stage for sustained higher prices, and the drought has kicked the price movement into high gear.

The demand increase also has raised the lower boundaries for crop prices. Prior to 2007, monthly average corn cash prices would sometimes drop below $2 per bushel, and monthly average soybean cash prices would approach $5 per bushel. Since 2008, the lowest monthly average corn cash price has been $3.25 per bushel, while the lowest monthly average soybean cash price has been $9 per bushel.

These higher cash prices have strengthened farm balance sheets across the nation. In 2008, while the rest of the economy sank into recession, U.S. net farm income was approaching record highs. In 2011, as the general economy slowly grew, U.S. net farm income topped $115 billion.

And the projections are that, even with the significant production pullback caused by the drought, 2012 U.S. net farm income will set another record, over $120 billion.

This improvement in the bottom line has not been evenly distributed, and many of you still face financial hardship. But the aggregate numbers show that a sizable portion of you in row-crop production have built up your financial reserves.

The strength in the farm balance sheet has definite marketing implications. As you conduct your business in the aftermath of this year's drought, there's limited panic or necessity selling since, as a row-crop farmer, you have the funds to meet cash flow needs. This allows you to be more selective and strategic as you look to market your crop.

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