Historic Drought Conditions Create Volatility in Ag Markets, Threat to Yields
The drought in this growing season marks a stark difference from the wet planting and harvest seasons of the last few years. The shift in weather has a direct impact on the vitality and yield of crops, but this lack of moisture is also affecting the ag markets.
Eastern North Dakota has experienced wetter growing cycles for the last 20 years. Most years, crops have had plenty of moisture, resulting in higher-yielding crops and more product in the bin.
“Inversely, a drought often results in poorly yielding crops which means lower ending stocks and less product to sell for the farmer,” said Todd Borchardt, Langdon Location President and Chief Ag Credit Officer. “This is impactful locally and globally as well depending on the expanse of the drought.”
On average, North Dakota and South Dakota grow 10% of the country’s soybeans and 7.5% of the country’s corn crop (Source). These shares are large enough that a poor crop in the Midwest will affect national totals. The USDA’s World Agricultural Supply and Demand Estimates revealed that corn and soybean supplies will remain tight for the next 15 months.
The U.S. drought monitor showed that dryness covered more than 40% of the country in May, which is historic (Source). According to USDA meteorologist Brad Rippey, there have only been four springs in the last two decades with more than 40% drought coverage. As of June 15, 10% of the contiguous U.S. was under exceptional drought (Source)
For growers in the Dakotas, the situation is especially critical. Consistent above-average temperatures and below-average precipitation have led to a severe decrease in soil quality. Windy conditions and lack of moisture forced many farmers to plant in dry soil, resulting in decreased germination rates in seeds.
“Producers can really only focus on what’s controllable, and unfortunately rain isn’t one of those things,” Todd said. “We have great protections in place today in terms of multi-peril crop insurances that will help supplement the financial impact of not producing a crop, but this doesn’t address the resulting decline in stocks. Commonly, this means that commodity prices will remain higher during drought cycles based simply on supply and demand.”
The current drought is creating volatility in commodity prices. It is expected that high commodity prices will encourage growers to expand plantings this year. According to the USDA, farmers intend to plant 252 million acres of the eight major field crops — corn, soybeans, wheat, cotton, sorghum, barley, oats, and rice — this year, up 3% from 2020 (Source).
“Although many areas have received good rain events in the past month, some feel that early planted crops may have already suffered through enough of a dry stretch to substantially impact yields at harvest time.”
“Traditional commodities remain very strong right now,” Todd said. “Corn, wheat, and soybeans flutter at levels we haven’t seen for a decade. I would expect that we’ll continue to see this until there is more certainty regarding a harvestable crop throughout the Corn Belt of the country. Although many areas have received good rain events in the past month, some feel that early planted crops may have already suffered through enough of a dry stretch to substantially impact yields at harvest time.”
According to the June 10 USDA WASDE Report, worsening drought conditions in the northern Corn Belt could strengthen corn prices and also reduce the anticipated 2021 total U.S. soybean production, strengthening new-crop soybean prices in the coming months.
The ag market hyper-volatility can lead to risk management issues and difficult decision-making when a time-sensitive decision is needed. The constant state of flux in the markets can be intimidating, especially for producers less familiar with the markets. To help navigate the volatility in the ag market, Chip Flory, host of AgriTalk at the Farm Journal Broadcast, recommends paying “less attention to price and trend and focus on margin and profit. Focusing on margins and profits can help manage the emotional side of making sales in these dynamic markets.” (Source)
Although, volatility in the ag market can be a positive thing for producers who are active marketers.
“We’ve seen many producers be very successful in commodity environments like this before, and we recommend guidance from professional marketing consultants to help them make sales that align with their farm and risk profile.”
“Despite the unknowns of crop production, the market still provides opportunities to forward sell futures for 2021 and even the 2022 crop that can help hedge price risk for the producer,” Todd said. “Many are proceeding cautiously with this until they have more comfort in what our harvest season this year will look like. We’ve seen many producers be very successful in commodity environments like this before, and we recommend guidance from professional marketing consultants to help them make sales that align with their farm and risk profile.”
The best thing for producers is to seek out the advice and guidance of professionals in areas they are uncomfortable. Your banker or crop insurance advisor will be able to help you navigate the present ag environment and ensure you avoid any unnecessary risk.
For more information on ag solutions or to find an ag expert near you, click here.