Drought Could Shrivel Farmers’ Earnings

Posted On July 03, 2012

corn(West Lafayette, Ind.) – Indiana farmers should blame the ongoing drought in the state if their yields are down, Purdue University farming experts say.


Indiana’s average rainfall since May 1 has been about half of what it usually is. In the southeast part of the state, rainfall over the past 30 days has been three to four inches below normal, according to the National Weather Service.


Nearly 69 percent of the state is in a severe drought. Farmers already expect to see some lower yields from their crops. Indiana’s corn crops are entering their pollination phase in very dry conditions, which could mean large crop losses for some farmers.


Crops could be down so much that farmers who signed future delivery contracts with grain buyers may be force to buy back some of the bushels they may not be able to supply.


“We’ve been hearing of producers calling their grain managers and talking with them about the possibilities of dealing with these yield reductions,” said Purdue agriculture economist Chris Hurt. “Right now it’s hard to say what will happen because nobody knows where grain prices are going to go.”


Hurt gave the example of a farmer who agreed to sell corn at $5 a bushel based on an anticipated production of 150 bushels per acre, for $750 in revenue per acre. If drought reduced the farmer’s production to 120 bushels per acre and pushed cash prices to $6 a bushel, the farmer would deliver that smaller crop at the price agreed upon but then have to pay the buyer for the 30 bushels per acre the farmer was unable to supply. That undeliverable charge would be $30 per acre, based on the $1 per bushel more than the contract price the grain is now worth.


“That 120 bushels delivered would only generate $600 for the farmer,” Hurt said. “Then, after the farmer paid the $30 on the non-delivered grain, they would have only $570 of revenue per acre, or $180 per acre less revenue than they had originally planned.”


Farmers in such a position may have three options. They could buy back the unproduced bushels, buy corn or soybean futures to offset some of the price impacts, or buy call options which are contracts that give farmers the right to buy a fixed number of bushels for a specific price by a specific date.


Hurt said corn prices are expected to hit $7 per bushel, but could approach the all-time high of about $8. Soybeans could exceed $15 per bushel if the supply remains low because rain does not spur the yields.


“We have a very bullish situation ahead if the drought continues,” Hurt said. “We could have quite an explosive market. But that could all change if we get rain.”