Drought is likely to drive up prices, send corn forecast to 17-year low

  • Article by: JIM SPENCER , Star Tribune
  • Updated: August 11, 2012 - 11:15 AM

USDA projects corn yields at a 17-year low; Minnesota has escaped the worst.

WASHINGTON - A withering national drought will likely push corn yields to a 17-year low, the government said Friday in a report that amplifies the likelihood of higher prices for livestock farmers, food manufacturers and ultimately consumers.

The projections from the U.S. Department of Agriculture pushed corn futures to a new record of $8.49 per bushel moments after the announcement, though they retreated and closed down for the day.

The government's survey of more than 25,000 farmers over the past month also led to a forecast that soybean yields will drop, as will production of eggs, milk and pork.

"This drought is the real deal," said Ed Usset, a grain marketing specialist at the University of Minnesota's Center for Farm Financial Management.

Relative to expectations, this year in agricultural production "is shaping up as one of the five worst years in the last 100," Usset said. "Don't be shocked if you see high meat and dairy prices in the 12 months ahead."

While Minnesota consumers and food manufacturers will pay more, the state's corn growers -- who benefited from heavy spring rains -- have escaped relatively unscathed. The USDA projected yields on the state's 8.25 million acres of corn at 155 bushels per acre, down just one bushel from 2011. With high corn prices, Minnesota farmers with good crops could have a golden harvest.

Other major crops in Minnesota also are faring well, particularly compared with the rest of the nation. The state's soybean yield is expected to be only a half-bushel less than last year. Nationally, soybean yields are expected to be down 5.4 bushels per acre, the lowest mark since 2003.

Spring wheat yields are forecast at 7 bushels more per acre than last year -- a 15 percent increase. And sugar beet production is expected to be 27 tons per acre, a 42 percent hike over last year. If that forecast is realized, it would be a new record-high Minnesota beet yield.

Heavy spring rains in Minnesota have helped, said Mark Seeley, a climatologist with the U Extension Service.

In other Midwestern states, the weather was not as forgiving. The USDA projected Illinois and Indiana will have corn yields more than 40 bushels an acre below 2011. Iowa and South Dakota are expected to be down more than 30 bushels.

No formula can precisely translate those supply shifts into increased costs. But with corn already selling at an all-time high, there is no question which way things are heading.

"It's scary when you see the numbers out today," said Terry Roggensack, an analyst at the Hightower Report in Chicago. "Unless there is normal weather and rain from here on out, I can easily see prices for corn and soybeans" rising another 20 to 25 percent.

The overall economic effect in the United States will most likely be muted, however, because U.S. households generally spend only about one-sixth of their budgets on food and often elect to buy cheaper products rather than pay higher prices. On Friday, Capital Economics estimated that the rising food prices might knock 0.1 percent off of the annual pace of economic growth.

Severe weather has also hurt agriculture production in other major export countries, including Brazil, Russia, Australia and India. That means higher prices for commodities including sugar, soybeans, corn and wheat, as well as the products produced from them. The United States grows about 40 percent of the world's corn and soybeans as well as 20 percent of the wheat.

On Thursday, the U.N. Food and Agriculture Organization said global food prices had jumped 6 percent in July, with the price of corn up 23 percent. It said that countries that rely on imports of corn and soybeans -- including China and Mexico -- would be the areas worst hit by the price increases.

The U.S. and international reports have raised concerns about falling food supplies in developing countries.

"The United States is the world's largest exporter of corn, soybeans and wheat, and likely price spikes will ripple through markets globally, with devastating consequences for those already struggling to get enough food to eat," said Eric Munoz, a senior policy analyst with Oxfam, an international aid organization.

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