COBANK RELEASES THIRD QUARTER RURAL ECONOMIC REVIEW
Oct. 23, 2012
Source: CoBank news release
United States agricultural markets are anxiously anticipating next year's harvest - in South America. According to CoBank's recently released Quarterly Rural Economic Review, drought-stunted supplies of feed grains and soybeans have bolstered U.S. prices and are imposing debilitating cost pressures on the animal protein and dairy complexes.
For good or ill, this trend could be significantly exacerbated by the success or failure of South American harvests to meet world expectations.
In the report, titled "Sputtering Global Economy and Drought-Impaired Agricultural Markets," CoBank notes that "the near-term outlook for agricultural markets depends critically on next year's South American crops. If they fall short of the markets towering expectations, as they did last season, prices in the grain and oilseed markets could soar to new record highs."
Unsurprisingly, the report, which takes a comprehensive look at economic and agricultural trends for the third quarter of 2012, focuses heavily on the ill-effects of the 2012 drought, now rippling through the agricultural markets.
As growers harvest what remains of crops damaged by drought conditions rivaling those of 1988, the report notes that recent indicators suggest dramatic differentials in harvested yields and grain quality, not simply by district or county but also from field to field. Current stocks are tight as a drum, and prices remain extremely volatile. The latest estimates indicate that crop harvests this year will be well below trend expectations.
Despite sharply lower production, growers will receive significant revenue support from crop insurance indemnities and elevated prices. Grain handlers, however, will be less fortunate. Following the flurry of grain storage construction in recent years, the industry will fill its bins only to about 65 percent of capacity this year.
In addition, drying revenues will decline, and a market price inversion will prevent elevators from earning a "carry" as they hold inventory over several months. Grain handlers will also have to contend with higher concentrations of aflatoxin in their corn deliveries this year.
Even harder hit will be the animal protein, dairy, and ethanol industries. These industries will bear the brunt of the 2012 drought in the months ahead. Ethanol margins have been severely squeezed by the high corn feedstock prices.
Moreover, with feed costs having risen more than 50 percent over the past two years, the livestock industries will be adjusting their operations for months - or even years - to come in an effort to restore profitability. Their only hope for getting market prices realigned with break-even price levels is by culling their herds and flocks substantially.
Surprisingly, after trimming inventory and cutting back on production during the past year, the broiler industry is better positioned to weather the shock of high feed prices for the next year or so.
Issued by CoBank's Knowledge Exchange division, the Quarterly Rural Economic Review provides valuable perspective on market conditions in the industries served by the bank. CoBank regularly invests in research and knowledge-sharing programs in order to offer greater service and value to its customers.
CoBank is a $90 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 70,000 farmers, ranchers and other rural borrowers in 23 states around the country.
CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture and the nation's rural economy.
Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.
For more information about CoBank, visit the bank's web site at www.cobank.com.