Drought and Floods: Billion-Bushel Risk

June 19, 2011 08:35 PM

Moisture is plentiful across most of the Corn Belt, but drought threatens a substantial portion of this year's corn and soybean crops.

Drought conditions have been intensifying and gaining ground in recent weeks from the Southwest and southern Plains to the Southeast.
“Drought is probably one of the biggest factors right now affecting grain prices as we move forward,” said David Smoldt, FCStone, LLC, operations vice president, in comments June 16 to an FCStone conference in Chicago.
USDA's June 14 Drought Monitor map shows “exceptional drought” – the most extreme intensity on its scale – in areas from southeast Arizona across southern New Mexico, much of Texas, the Oklahoma Panhandle, western Louisiana, southwest Georgia, and South Florida. Less severe drought and dryness
cover a huge arc from eastern Colorado and Kansas to the South, then up the eastern seaboard to Delmarva.
“Drought started in Texas and moved east to the Atlantic,” said Smoldt. “It's a major concern for us. That area accounts for about 1.3 billion bushels of corn and around 500 million bushels of soybeans.”
And along the Missouri, Mississippi, and Ohio rivers, flooding threatens land that produces another 540 million bushels of corn and 140 million bushels of soybeans.
“So about 1.9 million bushels of corn and 640 million bushels of beans are at risk in the drought and flood areas,” says Smoldt.
Texas state climatologist John Nielsen-Gammon said early this month that this drought is officially the third worst on records dating back to 1895, after the droughts of 1918 and 1956.
“You can't make up the losses” in moisture, Nielsen-Gammon says. However, he notes that in one year about a decade ago, the state had been very dry until late June. Then widespread rains of about an inch provided short-term relief across the state.
Slim prospects for relief
“In the short term, there doesn't seem to be anything useful” to ease the Texas drought, he says. June is normally a fairly wet month for most of the state. July is normally the driest month statewide, except for far West Texas, where rain comes from southwest monsoons.
“So unless you get an unusual disturbance in July, there are not many prospects for improvement,” says Nielsen-Gammon. “The odds at this time of year favor things getting worse before they get better.”

Price Prospects

Smoldt says that to some extent, strong corn yields in normally high-yielding states can offset lower yields in less productive states. “With good weather, we can do better than 158 bu./acre,” he says. December corn, trading near $6.50 has a 50-50 chance of going to $5.50, but “I don't see the market below $4.50 even if we have a 160-bu. yield.”
For soybeans, Smoldt says prices at $13.50 are in their upper 10% of the price range in the past five years. He sees prospects for soybean prices to get down to the five-year average $10/bu. at some point this year in response to rising South American production.
“Between now and harvest, we will continue to see a lot of volatility,” says Smoldt. With soybean prices at current levels, he says, “Producers should be selling. Users should go hand to mouth now until harvest, when this market likely will fall back probably into the lower part of the upper 30% range, to maybe $11/bu.”


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