Melvin Brees
Farm Management Specialist
University of Missouri Extension




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March 24, 2000

"The Drought of 2000"

The Palmer Drought Index used by many, shows dry conditions from Eastern Nebraska to Western Pennsylvania. Much of Iowa is rated as moderate drought and there are severe drought areas in Indiana and Ohio. Most of Missouri is rated as mild drought. All of the Southern states are also rated to be in various stages of drought. Last week, the National Weather Service released an April-June forecast for above normal temperatures and below normal precipitation for all of the Corn Belt and South. If this occurs, on top of already dry conditions, it could significantly limit 2000 crop production. Some ask, "Could this be another dry year like 1988?"

Large production and supplies have caused two years of low corn and soybean prices. However, demand has been strong and could quickly use up excess supplies if production is reduced. Projected ending old crop stocks amount to about 18% of last year's corn production and 12% of soybean production. It becomes obvious that only a 10-15% cut in production would have a huge impact on supplies and prices. In the drought years of the '80s ('80, '83 and '88) corn yields were cut 17% to 28% and soybean yields reduced 17% to 20% from the previous year. More recently, an 18% reduction in 1995 corn yields and a 14% cut in soybean yields led to record corn prices in 1996 and soybeans in the upper $8 range. This is why the market is nervous about dry weather!

Everyone also understands that a drought at this time of year is not nearly as important as what happens in July. Recent rains have produced an adequate crop moisture index (topsoil moisture measurement) in all of the Corn Belt and much of the South. The generally dry conditions, along with adequate topsoil moisture, suggest speedy planting and a good start for the crop. With adequate summer rainfall, another good crop translates into continued large supplies and a return to very low prices!

If you still have old crop (1999) corn and beans, your main concern is price. The risk of price declines and the uncertainty about how high prices might go suggests having downside price targets along with your higher price goals. These downside targets represent the "bail out" price that you sell if prices decline, before you lose all that you've gained by storing.

New crop (2000) is much more complicated due to both price and production risk. The best pre-harvest pricing opportunities may occur well before the time when production is somewhat assured. Crop insurance and the marketing loan provide some risk protection, but probably not enough. Other strategies such as spreading sales, using put options to protect prices or buying calls to offset forward contracts may also be needed to manage marketing risk.

The fear that the "drought of 2000" might or might not continue into summer is creating volatile markets. Wide price swings will accompany each change in the weather forecast. That makes it very easy to pass up good opportunities when you expect the worst (or best) to happen. Try to avoid that.-- Melvin

University of Missouri ExtensionDecisive Marketing - March 24, 2000 -- Revised: April 20, 2004