It’s been hot and dry, and the U.S. corn crop is burning up. Judging by rising prices, wheat is not doing too well either, and soybeans have only a few weeks of grace before facing the same yield losses as corn. The world will have to adjust to this “exogenous shock.”
Some examples of how this may work out, in major or minor ways, illustrate the complexity of the modern global economy.
In coming months, manufacturers and retailers of the ubiquitous sausage-like bags used to preserve whole-plant corn silage will sell more such bags than they would have without the drought. When corn is drought damaged, chopping it for whole-plant silage is often the least bad alternative. So vendors of silage-related machinery and supplies may see a good year even with a bad crop.
However, sales of all sorts of farm machinery are tanking, leading to things like Goldman Sachs’ recent downgrade of John Deere stock.
Oil companies selling bunker fuel for ocean-going ships in South American grain export ports like Santa Fe, Argentina, will see increased sales, but their counterparts in New Orleans will lose business. U.S. exports will drop. South American exports will rise, and any business in either region connected to shipping will feel the consequences.
Brazilian sugar-cane farmers may keep existing stands of cane for another year when, if not for the drought, they might have plowed them up to establish a new stand. Sugar cane is a perennial crop, but fields need to be replanted every few years to maintain optimal production. Newly planted fields have low yields at first, however.
World prices for ethanol will rise due to the bad U.S. corn crop, and cane ethanol producers will have to decide if keeping a declining field in production one more year to capture this windfall isn’t better than maintaining an optimal agronomic rotation. In the meantime, this will be a harsh year for U.S. ethanol plants.
There will be much less corn to dry, and hence slack demand for liquefied petroleum gas, also known as propane. Drivers for the transport companies that haul propane from terminals such as Rosemount to rural fuel dealers won’t put in as many hours as in other years.
However, food vendors and others who cater to drivers of soybean trucks that back up for 30 miles, waiting to unload at the Brazilian port of Paranagua, will have a good year. Brazil’s inadequate grain handling facilities remain the Achilles’ heel of that nation’s agriculture, and even small blips in export volumes stress the system greatly. Drivers can wait days to dump their hauls, and in the meantime, their needs must be met.
In Poland, small farmers will get better prices for chicken and hogs because the competition — the more industrialized animal operations in northwest Europe — will see sharp rises in input costs due to drought-induced higher global prices.
Appliance and auto dealers in towns that are home to John Deere, Case IH, and other implement factories will see lower sales because the workers at those plants will get shorter hours. When incomes drop, households cut back much more on such “consumer durables” than on necessities like food or clothing.
The government of Argentina will see its budgetary problems eased by rising revenues from export taxes on corn, wheat and soybeans. Once again, North American farming’s loss is South America’s gain. But the government of President Christina Fernandez de Kirchner has a long history of trying to capture any windfall gains Argentine farmers might get from international price increases.
Ocean shipping rates for bulk commodities may rise since distances from South American grain export terminals to Europe are about 20 percent greater than from U.S. gulf ports such as New Orleans. It simply takes more ship charter days to transport the same quantity of grain.
U.S. consumers will see increases in chicken prices almost immediately, since chickens have a very short production cycle. Increased feed costs pass through quickly.
However, beef prices may actually decline for a few months, especially for leaner cuts, since the same drought that is scorching grain fields punishes ranches on much of the Great Plains. Ranchers are liquidating breeding herds, which adds to current beef production in the short run. Old cows don’t yield good steaks, but ground beef and pot roasts will be plentiful.
Farmers will make few discretionary purchases in areas scourged by drought. But retailers in those areas that get rain may have a great year. Southwest Minnesota is about the worst in terms of drought damage, but the west central part of the state is holding its own. Auto dealers in Worthington know they need to pull in their belts, but those in Willmar may let theirs out. Having a good crop in a year when the national crop is down is the best of all possible outcomes for a grain farmer.
Meatpacking plants in places like Sioux Falls, S.D., that get hogs from Canada may see reduced supplies. Manitoba and Saskatchewan are free from the drought so far. They grow little corn, but they grow a lot of barley that is a close substitute for corn in livestock feeding.
As world feed prices rise due to a bad U.S. corn crop, it becomes more profitable for Canadian farmers to sell their barley on export markets, less profitable to feed it to Canadian hogs. Thus Canadian hog production decreases, but shipping Canadian barley to Asia via British Columbia ports increases. U.S. barges, railroads and trucking may be in the doldrums, but the Canadian railroads may have great business, as will export elevators in Thunder Bay, Prince Rupert and Vancouver.
We live in a complex global economy. Bad weather over a dozen or so states in the center of our country will affect people on other continents who could not locate Iowa on a map.