Worst-In-Generation Drought Dims U.S. Farm Economy Hopes
Comment of the Day

July 16 2012

Commentary by David Fuller

Worst-In-Generation Drought Dims U.S. Farm Economy Hopes

Here is the latest from Bloomberg on this troubling situation which has global implications in terms of food prices. Here is the opening:
Cloudless skies seldom look so ominous.

A worst-in-a-generation drought from Indiana to Arkansas to California is damaging crops, rural economies, and threatening to drive food prices to record levels. Agriculture, though a small part of the $15.5 trillion U.S. economy, had been one of the most resilient industries in the past three years as the country struggled to recover from the recession.

"It might be a $50 billion event for the economy as it blends into everything over the next four quarters," said Michael Swanson, agricultural economist at Wells Fargo & Co. (WFC) inMinneapolis, the largest commercial agriculture lender. "Instead of retreating from record highs, food prices will advance."

The U.S. Department of Agriculture declared July 11 that more than 1,000 counties in 26 states are natural-disaster areas, the biggest such declaration ever. The designation makes farmers and ranchers in affected counties -- about a third of those in the entire country -- eligible for low-interest loans to help manage the drought, wildfires or other disasters.

"The drought will have regional, national and even international impacts," Ernie Goss, a professor of economics at Creighton University in Omaha, Nebraska, said in an e-mail.

Farm income, which has underpinned the growth of many rural states, will be under "significant downward pressure," Goss said.


"Usually at this time we're selling planters and tillage and we're not selling near what we have in the past because people are waiting to see how bad this drought is," said Allen.

"I had a call from one of my farmers who usually buys a combine every three to four years," said Allen. "If he doesn't get rain he'll probably bypass it."

The acreage impacted by drought have expanded rapidly, according to the government-funded U.S. Drought Monitor in Lincoln, Nebraska. In the high-plains states of North Dakota, South Dakota, Wyoming, Nebraska, Colorado, and Kansas, the areas designated as being in moderate to exceptional drought rose to 84 percent as of July 10 from 74 percent a week earlier.

In the Midwest, 63 percent of the region was in drought as of July 10, up from 53 percent on July 3. Key corn-growing states, including Indiana, Illinois, Iowa and Missouri, are listed as abnormally dry or worse. Yet within those regions, some states have fared better, such as Minnesota and North Dakota, where about 25 percent of each state is experiencing drought.

David Fuller's view When Fullermoney began covering this drought in June the first implication was that it would further delay a rebuilding of global stockpiles of staple grains required to prevent shortages and discourage runaway prices. Unfortunately, for the third consecutive year global supplies of corn, soybeans and potentially wheat will remain tight.

The key day reversals for corn and soybeans last Wednesday, following the USDA's latest crop report, never received the required downside follow through to signal peaks of at least near-term significance. Obviously this remains a weather related story and the drought will break, albeit not soon enough to prevent significant damage to this year's yields. Meanwhile, reports indicate that rain last week was 50% below average in the main Midwestern grain and bean growing states. Moreover, temperatures were forecast to rise once again this week.

Today's additional gains for corn (weekly & daily) and soybeans (weekly & daily) have taken prices back to historic peaks. Lateral and psychological resistance near $8 for corn and near $16 for soybeans would ordinarily represent red flags of caution for speculators. However, commercial consumers of these staple grains will pay handsomely to secure their required supplies. These historic charts of corn and soybeans, which are not adjusted for inflation, provide further evidence that the commodity supercycle is intact, at least in the agricultural sector, fuelled by increasing demand and tight supplies. Both corn and soybeans are overextended in the short term but probably require a change in the weather to trigger a meaningful correction

Wheat (historic, weekly & daily) has been less affected by the current drought but prices are anticipating additional demand due to potential shortages in corn and soybeans. Wheat has also returned to the last area of resistance just above $9 in February 2011, but is well below the 2008 spike highs.

For all three of these staple foods, closes beneath last week's reaction lows seen on the daily charts would confirm a loss of near-term upside momentum.

Elsewhere, the UK, having experienced a drought last winter, has had the wettest June on record, with no respite in July to date. There has also been a considerable amount of rain in parts of the European Continent and Ireland. This has been described as good for yields in the fields but the current question is how much of this enters the food chain. Excessive moisture increases the risk of crop disease and also endangers the harvest.

Agriweek - Worst U.S. drought since Reagan was president - My thanks to a subscriber for this informative report, released to day.

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