"The most widespread drought in a
decade is dividing the U.S. farm sector into winners and losers.
With more than half of U.S. corn and
soybean acreage facing drought conditions, some farmers are calculating whether
insurance payments will cover the cost of the crops they have sown this year.
As of June 27, 65% of the Midwest
was in a moderate drought or worse, the broadest such area in a decade,
according to the U.S. Drought Monitor. The U.S. Department of Agriculture said
70% of the country's corn production area and 63% of soybeans were affected by
drought. The five-year average for U.S. corn in drought before this year is
18%, according to federal data, and 15% for soybeans.
In Coal Valley, Ill., where Megan
Dwyer's family raises corn, soybeans and beef cattle on 700 acres, the fate of
the farm's year depends on how much rain falls over the next few weeks.
"With the drought, we might not
even have a crop to sell this year," said Dwyer, a fourth-generation
farmer, at The Wall Street Journal's Global Food Forum event in late June.
Around one-third of winter wheat
grown in the U.S. is expected to be abandoned, according to federal data,
because the poor quality isn't worth the cost to harvest it this year. That
would represent the highest rate of abandonment since 1917.
Some livestock producers and meat
companies are bracing for higher feed bills that could follow a
smaller-than-expected harvest.
Farmers whose fields remain green,
however, are set to pad their incomes. Farmers outside of drought territory
could get another year of solid income just as corn prices were on the decline,
said Scott Irwin, an agricultural economist at the University of Illinois
Urbana-Champaign.
"My grandmother always told me
to pray for drought in Illinois," said Irwin, who comes from a family of
Iowa farmers.
Higher prices for crops also improve
prospects for global crop shippers such as Cargill, Archer Daniels Midland and
Bunge as concerns over supplies prompt grain buyers to make advance purchases.
ADM is estimated to earn more than
$3.7 billion in profit in its 2023 fiscal year, while Bunge is expected to make
$1.8 billion for the year, according to FactSet. ADM and Bunge had no comment.
"We don't see weather
volatility getting any better," said Bunge Chief Financial Officer John
Neppl at a May investor conference. "When you have a global platform like
we do and you have all the origin-destination combinations that we can put
together, that really bodes well for a business like ours."
Wheat futures were up about 10% in
June. Corn and soybean futures, which had traded higher as drought spread, have
fallen in recent days as traders responded to wetter forecasts in the Midwest
and expanded corn acres detailed in a USDA report.
How the weather ultimately impacts
farmers' harvests this fall could hinge on the next few weeks, analysts and
farmers said.
Farmers' drought math can have mixed
implications for companies such as Corteva, Bayer, Deere and CNH Industrial,
which sell farmers seeds, pesticides and machinery.
While higher crop prices can mean
more money for farmers to invest in their next growing season, analysts said,
if the drought decimates too much U.S. farmland and farm income, farm suppliers
will suffer as growers transition to cheaper generic seed purchases or put off
equipment purchases.
Corteva said its success depends on
farmers succeeding, and droughts can impact their productivity. The company is
developing more drought-tolerant corn, a spokesman said. Bayer, Deere and CNH
had no comment.
Dry conditions bring new pests and
diseases that require additional farm chemical purchases. Joe Sinclair,
president of the farm retailer Quality Ag Services in Iowa, said insecticides
sales will be on the rise this year as the dry weather brings pests like
two-spotted spider mites into farmers' fields.
Higher grain costs from drought make
it more expensive to feed cattle, hogs and chickens.
Many hog farmers are struggling to
make a profit, and cattle ranchers have been shrinking their herds over the
past year as their feed bills go up.
Dairy producers will need to decide
whether to shrink their operations or eat the higher feed costs until the
market moves back in their favor, said industry officials. Ethanol producers
paying higher prices for corn could be faced with the decision of whether to
keep their plants running at lower profit margins or to cut production,
executives and analysts said.
For farmers with drought-withered
fields, crop insurance can help growers come close to break-even and defend
against bankruptcy, said Matt Bennett, an Illinois farmer and co-founder of
brokerage and consulting firm AgMarket.Net. But farmers will still struggle to
cover costs for fertilizer, fuel, seeds and other expenses.
"This was the most expensive
crop ever put into the ground by a U.S. producer," Bennett said." [1]