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DAVID KRUSE

By Staff | Jul 27, 2012

Three weeks ago corn on lighter soils was still looking buff. Today it may be totaled, not worth running a combine through.

Somehow, over a century ago my great-grandfather picked a farm near Royal, with a Marcus/Primghar heavy soil type that over the years cost more crop production from being too wet than too dry.

We have invested in a lot of tile. The soil profile holds 12 inches of moisture that corn can access during drought. It was full on June 1, plus receiving 2.32 inches in June. We have gotten no rain that has mattered since June 16.

My rough calculation of corn plant water usage indicates that without rain we run out around, July 26. That would be just joining the crowd at this point. There was only 4 percent of Iowa corn still rated excellent on July 16.

Given the forecast, no one will escape crop damage this year, even the irrigation in Nebraska couldn’t keep up. I have been using 130 bushels per acre for the U.S. average yield, while scratching my head about who is going to have the corn to average up the enormous amount of poor/very poor acres to get the yield up there.

Once the corn has fired, rain then doesn’t bring it back.

Soybeans are next. Once pods abort they are done, too. Acreage abandonment will help the yield average. USDA doesn’t calculate average yield quite like you and I do. If we had 100 acres and 10 were drowned out and we harvested 15,000 bushels of corn we would likely say the field made 150 bpa. USDA would lose the 10 acres, divide the 15,000 bushel by 90 acres and report the yield as 166 bpa. Either way you still have 15,000 bushel of corn, but USDA gets a higher yield. Only acres harvested for grain are counted.

Based on past drought history we could expect 15 percent abandonment, while USDA was still at 7.8 percent in the July report. So when I say the average U.S. yield could be 130 bpa or less, that means that yield after 15 percent abandonment.

If the drought pattern holds the next few weeks the disaster amplifies beyond the ability of end-users to cope. They don’t grow much corn between Minneapolis and Duluth where it has been raining.

Crop insurance adjusters and claim processors are going to have an unprecedented amount of work to do this fall. I have heard estimates thrown out that the loss to insurers could be $40 billion. There is a lot of revenue insurance coverage today. Those that took the fall price option will get the average price of corn and soybeans for the month of October so the revenue guarantee is not set yet and goes up with the market.

The maximum it can go up is twice the spring price which is $11.36 for corn and $25.10 for soybeans. I would not rule out $10 corn and $20 soybeans if the drought continues through August. I am told that such a loss can be covered by insurers.

The RMA, crop insurance companies and re-insurers split the loss. They have increased the threshold for the size of claims triggering an audit to $200,000 from $100,000. Otherwise all they would be doing is audits. It is $200,000 per county, per entity, per crop.

That should cut down on the amount of audits. If audited they check one year and if there is no discrepancy it ends or if there is something off slightly they go back three years. They tell me something is always off slightly.

On silage the adjuster has to be there before they start chopping and he determines where the check strips are. Frankly they can’t accurately estimate the yield from silage corn under these conditions. The fill is just not going to be anywhere near normal. For those rich enough to forgo crop insurance, they frankly will need $8 corn to come out.

The urban coffee shop will likely think that with $8 corn and $17 soybeans that the farmers are all getting rich, but the reason prices would be there is that they don’t have any to sell. These high prices will cost them in the long run. The gross per acre typically doesn’t change all that much. If farmers get to sell 200 bpa corn for $5 bushel or 100 bpa corn for $10 bushel the gross revenue is the same.

What the high prices do is destroy demand. Next year with the El Nino we could have a 15 billion bushel corn against demand that has been shrunk to 11 billion. Everybody is worried about where to sell this year’s crop when I think that will pretty much take care of itself, while I think next year is where the risk now lies.

2013 corn and soybean prices are going to lag 2012 prices badly. $6 corn may not seem as good as $8 corn, but with good yields could conceivably produce higher gross revenue than this year. Demand is being destroyed.

I see exports shutting down and some potential for corn/meal imports from Brazil into the East Coast. Ethanol plants are slowing production with some closing. Sow slaughter is surging forcing producers who want to sell sows to take a number.

I think we will see a surge of non-fed slaughter from both the dairy and beef herds. The cattle industry cannot stabilize until the drought stops. The trade is focused on the demand destruction and it is occurring.

Nobody wanted to pay $8 for December corn. I still think, however, that those volunteering to use less corn will fall short of the reduced production. There will not be enough volunteers to quit.

Eventually the market will have to force them to. When that happen prices next year will have to go low enough to revive the demand that has been destroyed by this drought.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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