This Drought Different From Last Year's

Bigger, wider drought coupled with short feedstuffs and global economic problems.

Published on: Jul 10, 2012

Not only is this drought year different from last year in its geography but it's different in the impacts it is having and could have.

The drought this year is quite different from last year in several respects and that may impact the likelihood and severity of market impacts compared to last year. The latest U.S. Drought Monitor shows this year's event is less severe but more widespread. It also has been growing northward as some serious droughts in the 1950s did.

Last year at this same time, nearly 12% of the country was in the worst drought category (D4), much of that located in the southern plains compared to less than one percent in D4 now. The total of D3 and D4 last year was just under 19% compared with 10% this year.

Bigger, wider drought coupled with short feedstuffs and global economic problems.
Bigger, wider drought coupled with short feedstuffs and global economic problems.

However, this year more than 76% of the U.S. is abnormally dry (D0) or worse; roughly double the 37% tally of abnormally dry or worse conditions this time one year ago.

This new drought has some distinctly different possible outcomes from last year's drought, too, says Derrell Peel, Oklahoma State University Extension livestock marketing specialist.

One of those differences is the hay situation across the nation, Peel says. Last year, good hay production in the northern half of the country supplied the tremendous demand for hay in the Southern Plains and resulted in what is no doubt the largest and most far reaching movement of hay ever seen in the country.

However, lower total hay production in 2011, together with drought-magnified demand, left the nation with significantly smaller hay stocks on May 1, 2012 in many states in the central and southern plains and the Midwest, Peel says.

The widespread drought this year is no doubt limiting hay production again so overall supplies will be tight and with drought concerns over a broad area, hay stocks will be held in tighter hands this year.

Result: there will be less hay available, at any price, if the drought continues this summer.

Difference Two

Cattle markets are more vulnerable this year to short-run price impacts from drought, Peel says. Because the drought region was so focused last year and conditions were so drastically much better in other regions, the enormous marketings of feeder cattle and cows in the Southern Plains last year had less impact than typical for a drought of that severity.

Last year, the ability to relocate cattle to regions of good forage or into feedlots combined with an overall strong cattle market and kept market price impacts for feeder cattle and cows to a minimum.

This year, widespread drought over a much larger region, even if the drought overall is less severe, reduces those options and increases the likelihood of more pronounced short-term market impacts, Peel says. Relatively few people selling some animals over a wide area is likely to have more market impact than many people selling many animals in one region when good conditions exist outside that region.

For producers who determine now that some feeder cattle or cows will need to be sold before fall, the danger of waiting is higher over the next couple of months. Peel adds.

This is especially risky since the drought is not only impacting pasture and hay production but is also impacting feeder markets through sharply higher feed prices.

Difference Three

The widespread nature of this drought pattern is driving feed-grain prices higher as the futures markets begin rationing demand.

Arlan Suderman of Farm Futures magazine has projected $20 beans are a reasonable near-term target.

Kevin Hackett, author of the Hackett Money Flow Report, says his historical research suggests if the drought persists corn could hit $10 and beans could reach $25.

The extremely tight worldwide stocks of feed grains are pushing market panic higher and increasing volatility ever more.

Difference Four

Peels says this year's also drought is leading toward ever-tighter supplies of feeder cattle later in the year. Depending on how the drought develops or fades this summer, calf markets could rebound significantly this fall. In the Southern Plains this will depend on fall moisture and decent wheat pasture grazing prospects, Peel says.

Difference Five

Further, the potential for this drought is coupled with a very likely probable global economic downturn.

Hackett notes a trend in rice consumption that bodes ill for meat consumption. He says there have been serious increases in rice consumption patterns in India and China since 2008, with both countries setting new records.

"If I am right about a very severe global recession taking place in 2013/2014 then this demand uptrend will grow even faster as Indian and Asian consumers eat what they can afford which will mean more rice and less high-priced meat," Hackett warns.

Repeating that last part, Hackett says Indian and Asian consumers will eat what they can afford. If the global economic situation continues worsening that means they'll eat more rice and less meat."

These have been growth areas for beef and other meats and if Hackett is correct this could have significant downward impact on beef and cattle prices.