Drought Packs Punch On Protein Sector; Feed Prices Destined To Climb

Even with recent rains, ag leaders tell USDA Under Secretary for Farm and Foreign Agricultural Services that Michigan has yield loss.

Published on: Jul 19, 2012

This year's growing season was being compared to the drought of 1988, but as USDA Under Secretary for Farm and Foreign Agricultural Services Michael Scuse made several stops in Michigan to meet with agricultural leaders and growers in mid-July, the consensus was it's even worse.

On the farm of Michigan Agri-Business Association President Jim Byrum in Onondaga, the damage was evident, as corn was shriveled and brown and struggling to tassel. What was green was curled tightly and into survival mode. "The damage has already been done," Byrum says.

ASSESSING THE DAMAGE -  USDA Under Secretary for Farm and Foreign Agricultural Services Michael Scuse visits with grower Gary Haynes, who farms the ground of Jim Byrum in Onondaga.
ASSESSING THE DAMAGE - USDA Under Secretary for Farm and Foreign Agricultural Services Michael Scuse visits with grower Gary Haynes, who farms the ground of Jim Byrum in Onondaga.

Even with the rain that moved through Michigan this week, Byrum says,"There will be yield loss."

Scuse has been touring several states to assess the damage where 60% of the country is dry and 1,000 counties to date have been declared disaster areas.

Scuse, who farms 1,700 acres of corn, soybeans and wheat with his brother in Delaware, says, "I understand it's particularly devastating for Michigan growers who have already taken huge hits with fruits and vegetables – some of them not offered under crop insurance," Scuse says. "I understand the economic toll it will take and not just on farmers, but also agribusiness and other supporting industries. This is a learning process for us in trying to determine what we can do to make things better, not only this year, but going forward."

Jim Byrum
Jim Byrum

The protein sector is primed to be hit hard as feed prices will inevitably increase dramatically.

Paul Anderson, chief credit officer with GreenStone Farm Credit Services, says protein markets are poised to go through the woodshed. He predicts livestock herds in the West will thin out first because they tend to buy more of their feed.  "For cattle, it looked like it would be a break-even year, or maybe make a couple hundred kind of year, but with this drop in available corn silage, it's going to be a challenging year," he says. "The poultry market was just bouncing back and now with high corn prices, it's going to be challenged again."

Adding to the frustration for growers is the loss of five disaster programs that expired Sept.30, 2011, increasing the urgency for a new farm bill.

Scuse says, "We need a farm bill and we need one sooner rather than later. We need a livestock indemnity and disaster programs so we can get assistance out in the country. The banking community also needs some certainty."

However, while it's not going to help the livestock industry, Anderson noted a difference from the 1988 disaster --  wider acceptance of crop insurance and the safety net it provides. "For those that didn't have coverage, it's an educational lesson in managing your risk profile."

Another difference is farmers today have stronger balance sheets than they did at that time. "And we have cheap money, and that's the only redeeming part of this scenario, but debt is debt," Anderson says. Interest rates are also lower, he noted, allowing farmers to lower the cost of funds for the expenses they can control.

With exceptions of some pockets that received showers, almost all crops south of I-96 are in trouble, according to Eric Cook from Spartan Insurance, headquartered in Ithaca. "Here in Gratiot County we're in the sweet spot of the state with some great, timely rains that the rest of the state did not receive, but that could change quickly."

To help producers and to get assistance to them, Scuse says USDA has already taken a few steps to streamline the process, including trimming the average 89 days to declare a disaster area by lifting the requirement for a request from the Governor.

"Another problem, and we actually found this last year, is the emergency loan interest rates were higher than those offered through Farm Service Agency. They are now 1% below current loans with a cap of 3.75%," he says.

Scuse also noted that in the past, there was a 25% reduction on rental rates on CRP land being used for hay or graze. The reduction has now been reduced to 10%.

To help ward off future collapse of the tart cherry industry decimated this year by frost, Scuse says he would investigate what's needed to get at least a crop insurance pilot program for tart cherries.

The run-up in commodity prices was already well on its way as Bruce Sutherland from Michigan Agricultural Commodities,  explained that unlike  1988, there is only a 7% corn carryover this year  versus more than six months in 1988.

Byrum says, "Farmers are always optimistic – almost to a fault. But, the reality is we have already lost yield potential.  Supplies will be rationed by price."

For consumers, Jim Zook, executive director of the Corn Marketing Program of Michigan and the Michigan Corn Growers, doesn't think it will reflect on food prices in the near future because only a small percentage of the cost of food is tied to the producer. "We could have a $2 sway in corn prices and that might equate to a 5 cent difference for the consumer. The farmers will take the hardest hit from this drought."

For other commodities, Jim Howe of Star of the West Milling in Frankenmuth, reports that the beet crop started with an unprecedented early planting, but is suffering from the heat and lack of moisture. "They are in survival mode," he says. For dry beans, "they are at a critical time frame," Howe says, "and as for cucumbers, some didn't even get planted without enough moisture."

Margins in ethanol did return some lately, according to Zook, "but that's short term," he says. "Facilities generally only reach out 30 days to buy corn. A Nebraska plant, that has deep pockets, has ceased operations. However, we can now bring in Ethanol imports from Brazil. The import tariff is off."