Beef industry expansion is likely postponed for another year.
Ranchers and farmers are used to fickle weather and its consequences. But the dramatic deterioration of grass and grain crops across the U.S. in the past two months has stunned the agricultural community.
Few folks forecasted the widespread drought that’s battered crops since May. The irony is that early 2012 held so much promise, as Texas and Oklahoma saw an end to their historic drought, and pasture conditions and crops responded well to spring rains. Meanwhile, ideal conditions throughout the Corn Belt led to one of the fastest and earliest plantings in decades.
USDA subsequently forecasted a yield of 166 bu./acre, a record crop of 14.790 billion bu., and an average price of $4.60/bu. Given that the average price of the 2011-2012 crop might be $6, such a decline would have brought much-needed relief to cattle feeders and other corn users.
These prospects have now evaporated, just like the moisture throughout much of the central U.S. By early July, drought was the number-one story for U.S. agriculture and the beef industry. Pasture conditions were deteriorating, forcing more young cattle into feedlots and causing more beef cows to be culled than expected. The condition of the corn crop was deteriorating as well, as hot, dry weather persisted.
Yet there appeared to be no immediate relief in sight as the crop entered its critical pollination stage. At the time of this writing (July 6), the 30-day forecast for much of the central U.S. was for temperatures to moderate but to remain average to above average for this time of year. More critical was that moisture was to remain below average. So the crop might suffer permanent damage during pollination, which would slash yields and keep corn prices well above $6.
In fact, USDA slashed its crop forecast on July 11 to 12.970 billion bu. with a 146 bu./acre yield and forecast prices at $5.40 to $6.40/bu.
Comparisons are already being made with 1988, which saw a disastrous decline in corn yields. In the last 52 years of yield data, 1988 produced the largest deviation, which was 29.1 bu./acre below trend line yields.
This year’s trend line yield is 163 bu./acre. USDA’s forecast was above this, but this fit with the fact that yields since 1960 have been above the trend 60% of the years and below the trend 40% of the years.
It’s likely a coincidence that Indiana’s corn crop in early July was in its worst condition since 1988. But one can only pray that yields for the 2012-2013 crop don’t fall as much below the trend as they did in 1988. This would mean a yield of 134 bu./acre. The lowest forecast I’ve seen is 146 bu., which is just below last year’s yield of 147 bu./acre.
Lack of rain has caused pasture conditions to deteriorate in much of cattle country. USDA on July 2 reported that 72% of the continental U.S. was in some stage of abnormally dry conditions, with more than 51% of the country in moderate or worse drought.
Of pastures, 43% were in poor or very poor condition, compared to 34% a week earlier and 27% the same week last year. Again, there was nothing in the weather forecasts that offered any moisture relief, apart from in New Mexico.
The implications are ominous for the beef industry. Any thought of net heifer retention and the start of herd rebuilding have likely dried up. Even before the drought began to spread, the national herd wasn’t expected to start growing until 2015 at the earliest.
Now, any growth appears to be postponed another year. This will put more pressure on a cattle feeding sector already struggling with significant over-capacity and negative margins due to high feeder-cattle and corn prices, and on the packing sector, which suffers from over-capacity as well.
The bottom line is that the entire infrastructure of the industry will keep shrinking unless it starts raining soon.