It looks like the harvest in Russia will be below expectations as well:
Aug 20, 2012
(Reuters) – Two leading Russian agricultural analysts cut their forecasts for Russia’s grain harvest on Monday after harvest data from two drought-stricken eastern growing regions reduced the outlook for the overall crop.
SovEcon narrowed their grain forecast to 71-72.5 million metric tonnes (…)
The government’s official grain harvest forecast is 75-80 million tonnes, of which 45 million tonnes could be wheat. The government has put this season’s exportable surplus at 10-12 million tonnes, a level seen by traders as an informal cap on exports.
The government has tried to reassure markets there will be no repeat of August 2010, when Russia’s government shocked markets with a snap decision to ban grain exports when the scale of losses from major drought became clear.
The government has indicated that protective tariffs could be an option, though only after the end of the calendar year.
But traders widely expect limits to be imposed in some form, perhaps as early as November, after heavy exports in the early months of the season showedRussiacould hit the 10-12 million tonne mark sooner than January.
Russia is still officially projecting 75-80 million tonnes but may only get 71 tonnes. If the projected exportable surplus is 10-12 million tonnes, but Russia actually harvests 9 million tonnes less than their hoped-for projection, then its exports will have to decrease to plug that gap.
Here’s the kicker: Russia has already exported a good deal of that amount. That is, the prospect of another Russian export ban this year is quite realistic. If we get one, then we can expect a repeat of the turmoil in the grain markets that we saw in 2010.
But there’s another much more fundamental reason why we can expect higher prices going forward.
Need for Even Higher Prices
The good news is that there’s still plenty of supply to carry us through to the next harvest. However, demand is going to have to go down some, and the way we accomplish that is through the price mechanism.
Right now, physical grain traders are saying that prices are too low and that unless they rise, we’re going to run out of grain before the next harvest. Obviously, that’s not truly going to happen – increasing scarcity will cause prices to rise until current demand levels are reduced.
Aug 20, 2012
Corn prices surged this monthto an all-time high of $8.4375 a bushel on the back of the worst drought in the US in nearly half a century. But prices have since fallen roughly 5 per cent. The impression is the rally has run out of steam.
This is far from the real picture. Prices need to rise again – probably setting all-time highs – to dampen consumption that is running ahead of supply.
If demand does not slow down, silos will be all but empty before the next harvest arrives in late 2013.
On paper, the balance sheet for corn supply and demand published by the US Department of Agriculture seems good enough. But in practice, the numbers look a bit shaky. The agency, whose figures are closely watched by the market, first estimates supply and, after that, adjusts the demand data to maintain a minimum level of inventories.
This time the USDA is asking for monumental rationing on the demand side. For example, US corn feed and export demand will need to drop to their lowest levels in nearly 20 years.
The USDA is also forecastinglower ethanol production- and thus corn demand. Ethanol output has fallen, but not nearly enough. Worse, therise in wholesale petrol pricesback above $3 a gallon means that ethanol producers are profitable again, even when paying record corn prices.
Corn is now trading just above $8 a bushel – but traders in the physical market say that prices need to rise to $9-$10 to force demand down enough to meet the consumption levels anticipated by the USDA.
The retreat in corn prices over the past couple of weeks has given inflation watchers a false sense of security. The market should not relax, however. More food inflation is just waiting around the corner.
The idea here is that the cash market will have to lead the futures market higher, an odd situation because it is usually the other way around. With so many hedge funds now playing in the commodity space, one explanation is that they are simply playing paper games with each other – those playing the short side will get a lesson in the importance of keeping one eye on reality.
A truly shocking event would be if the U.S. ever gets to the position of limiting exports of corn or even soybeans. That is a very unlikely proposition to consider, but if the silos get drained because we have dysfunctional markets that saw fit to keep prices bizarrely low while our free trade agreements allow the too-low grains to be exported, threatening domestic supplies, then that possibility notches up a little bit.
Dairy, Meat, and Even Higher Gasoline Costs
While it is clear that basic grain prices are heading higher, the knock-on effects into other soft commodities are a little less clear, but are definitely still important to consider.
The most obvious of these are higher grain feed costs that will hit both livestock and dairy producers especially hard:
The higher corn, soybean and wheat prices will reach food makers, exporters and eventually consumers. Drivers already have seen fuel costs climb because of higher prices for ethanol, a corn-based fuel that is blended into gas. The drought also has reignited the debate over whether ethanol production is a drain on global food supplies.
(Source)
Some are already turning to, shall we say, other means to keep their herds fed:
Aug 14, 2012
LOUISVILLE, KY (WAVE) – When you think of cattle feed, you probably don’t think of candy, but due to the drought that’s exactly what one farmer chose to do.
At Mayfield’s United Livestock in Western Kentucky, owner Joseph Watson feeds his herd second hand candy.
Watson started feeding his cattle the candy because corn prices were so high.
He mixes the candy with an ethanol by-product and a mineral nutrient. He monitors the daily intake and said the cows have had no real health issues.
Yes, the higher grain costs are going to hit everything from big cattle feedlot operations to my own two-bags-a-month chicken-feed usage.
However, it will be the cost of and even lack of hay that will really create some big problems later this year. The drought not only harmed the range and pasture lands, forcing greater use of stored hay to offset the decline in forage, but it put a huge crimp in this year’s hay production:
Aug 19, 2012
Widespread drought has scorched much of the pastureland and hay fields needed to sustain cattle herds in the U.S., forcing many ranchers to find feed alternatives or sell their animals early into what has become a soft beef market.
The shortage has led to higher hay prices, with some farmers saying they have to pay two to three times last year’s rates.
Despite farmers setting aside more land to grow hay this year, they are still producing a lot less because of the drought, according to a recent Department of Agriculture estimate.
The harvest of alfalfa, generally considered to make the best hay because of its high nutrient levels, is forecast to be the worst since 1953, according to the USDA.
Pasture grass and hay are what most cattle are fed for the roughly two years they live before being slaughtered, but the drought is threatening to starve the animals.
Illinois rancher Steve Foglesong said that most years he could graze his cattle from spring through November on verdant fields that are now brown, buying them hay bales only in the winter. This year, he and his animals have their eyes on withered corn plants.
“It may not have any ears on it, but it makes pretty good cow feed,” he said.
John Erwin, who owns 20 acres of land in Shelbyville, Ill., said he is having trouble growing alfalfa hay, but demand is strong for what he can produce.
“I’m getting calls from ranchers as far away as Wyoming,” Mr. Erwin said. “They’re desperate.”
He said he has been offered $250 a ton for his hay, nearly double the $130 a ton in a non-drought year. His fields didn’t produce any hay in July.
A doubling of hay prices is obviously going to create quite a bit of economic hardship for many farming operations, which tend to be marginal profit businesses even when everything is going well.
Here’s another view on the hay situation:
“Everybody is using their winter hay now. The pastures are destroyed and they probably won’t recover before winter,” said Caldwell. “The price of hay has doubled, and the availability is down by 75 percent.”
Caldwell is somewhat sanguine about his own lot, but not optimistic about what lies ahead.
“Today the problem is not nearly as bad as it’s going to be,” he told me. “It’s terribly bad today, but it is going to get a lot worse.”
(Source)
The drought has done some very serious harm to the nation’s hay supply that goes beyond the economics of higher hay costs. First there’s the supply of the hay, and then there’s the relatively poor quality of hay that was taken from non-irrigated, drought-stricken fields. All in all, it’s not a good situation.