Mother Nature Deal’s a Cruel Blow – American Farmers Hit by Worst Drought Since 1956

American Farmers have been hit with a cruel blow by Mother Nature as they come to terms with the 2012 drought. There are some analysts saying that this can run into 2013. The Palmer Drought Index is forecasting that it would require 9inches to 15 inches of rain falling in one month on the worst affected areas.

Now to put this in perspective the Palmer Drought Indices also look to predict this outcome and accordingly it is only a 1% chance of this occurring. It also requires this to be a slow and steady rain and not a quick downpour that would just wash all things away and make matters worse.

According to the National Climate centre 57% of the states are in midst of a drought (that is categorized as moderate to extreme drought conditions) and 38% in serve to extreme drought. The National Climatic Data Center states:

 “The July 2012 Palmer value of 57 percent is the largest percentage since December 1956 when 58 percent of the contiguous U.S. was in moderate to extreme drought.”

Ultimately, all the statistics aside most would say that if and when Mother Nature decides then the drought will be broken. In the meantime it will keep the world grain prices with a bid on any pullbacks. This is no consolation for US farmers that cannot capitalize on these high prices as their crops dry in front of them.

Adding more fuel to the fire this is not good news for food prices in an already stalling US economy. Although according to CIA data US Agriculture is only 1.2% of US GDP but economics would say food price increases will hit all parts of the economy and not just the farmers themselves.

The USDA, in its WASDE report, now expects Soybean yields at 36.1 bushels per acre that is lowest since 2003 and corn growers to average 123.4 bushels per acre that is a 17 year low. Furthermore, soybean production is forecast at 2.69 bn bushels, a 12% decline and corn production to be 10.8 bn bushels, down 17%.

Now lets talk about how to understand this in a trading aspect right now if one looks at the ratio of soybean prices to corn prices we get a yield figure which means we remove some of the volatility from the trade as it is not an outright naked position it is a hedged trade. To put this in perspective in the U.S. 2010/11 marketing year 2.20 was the ratio of average cash prices for soybeans ($11.45) to corn ($5.20) this is lower than the long term trend value of 2.50. At current levels the 2.08 ratio is historically low. This will mean that when the drought starts to break then farmers will look to plant more corn given the yield ratio so the trade then is short corn long soybeans. In the meantime expect to see this ratio remain weak or unless more damage is done to crop forecast of soybeans. Alternatively, if the view is of further deterioration in US crop production then this ratio will continue to weaken.

Mother Nature Deal’s a Cruel Blow – American Farmers Hit by Worst Drought Since 1956

American Farmers have been hit with a cruel blow by Mother Nature as they come to terms with the 2012 drought. There are some analysts saying that this can run into 2013 crops. The Palmer Drought Index is forecasting that it would require 9inches to 15 inches of rain falling in one month on the worst affected areas.

Now to put this in perspective the Palmer Drought Indices also look to predict this outcome and accordingly it is only a 1% chance of this occurring. It also requires this to be a slow and steady rain and not a quick downpour that would just wash all things away and make matters worse.

According to the National Climate centre 57% of the states are in midst of a drought (that is categorized as moderate to extreme drought conditions) and 38% in serve to extreme drought. The National Climatic Data Center states: 

 

 “The July 2012 Palmer value of 57 percent is the largest percentage since December 1956 when 58 percent of the contiguous U.S. was in moderate to extreme drought.”

 

Ultimately, all the statistics aside most would say that if and when Mother Nature decides then the drought will be broken. In the meantime it will keep the world grain prices with a bid on any pullbacks. This is no consolation for US farmers that cannot capitalize on these high prices as their crops dry in front of them.

Adding more fuel to the fire this is not good news for food prices in an already stalling US economy. Although according to CIA data US Agriculture is only 1.2% of US GDP but economics would say food price increases will hit all parts of the economy and not just the farmers themselves.

The USDA, in its WASDE report, now expects Soybean yields at 36.1 bushels per acre that is lowest since 2003 and corn growers to average 123.4 bushels per acre that is a 17 year low. Furthermore, soybean production is forecast at 2.69 bn bushels, a 12% decline and corn production to be 10.8 bn bushels, down 17%.

Now lets talk about how to understand this in a trading aspect right now if one looks at the ratio of soybean prices to corn prices we get a yield figure which means we remove some of the volatility from the trade as it is not an outright naked position it is a hedged trade. To put this in perspective in the U.S. 2010/11 marketing year 2.20 was the ratio of average cash prices for soybeans ($11.45) to corn ($5.20) this is lower than the long term trend value of 2.50. At current levels the 2.08 ratio is historically low. This will mean that when the drought starts to break then farmers will look to plant more corn given the yield ratio so the trade then is short corn long soybeans. In the meantime expect to see this ratio remain weak or unless more damage is done to crop forecast of soybeans. Alternatively, if the view is of further deterioration in US crop production then this ratio will continue to weaken.