2007 drought may spike commodity prices

Farmers throughout the Southeast took a shot from Mother Nature in 2007, but if the blows weren’t fatal for farmers, the end-result may be better prices and more flexibility in cropping systems for 2008.

Drought caused abandonment of large acreages of all row crops from north Florida through Virginia. Dryland corn was probably the most severely impacted, though non-irrigated cotton production is expected to be slightly lower than the 2006 crop. Winter wheat and early-planted row crops also took a big hit from an early season freeze and an extended planting season drought in the lower end of the region.

Though the Southeast doesn’t have the acreage to drive prices of corn, soybeans and wheat, the region does stand to gain from predicted good prices for these commodities in 2008.

Corn was the hot commodity in 2007, but many growers found out the hard way that growing dryland corn in the Southeast is a risky proposition at best.

Record corn crops were planted in several states in 2007, including a 39 percent jump in production in North Carolina. Despite the increased acreage, farmers in North Carolina produced less corn than in 2006, primarily a result of intense heat and drought. The scenario was much the same from Virginia to Florida.

However, nationwide the corn story was good. Producers responded to higher prices and returns for corn in late 2006 increasing corn planted acreage by 15.3 million acres in 2007 to 93.6 million acres, the largest area planted to corn in over 60 years.

In the Southeast much of this increase in corn plantings came from acres taken out of cotton.

With higher acreage and improved yields, corn production is forecast at a record 13.3 billion bushels in 2007-2008, 26 percent more than last year.

Total corn use is forecast to reach a record 12.6 billion bushels in 2007-2008, reflecting the expanding ethanol industry, continued strong global demand for corn and increasing U.S. corn supplies.

Despite greater total use, stocks of corn at the end of the 2007/08 marketing year are forecast to increase by over 50 percent to 2.0 billion bushels. The farm price of corn is forecast to average $3.20 per bushel.

King cotton on the other hand took a big hit in 2007 and more hits are forecast for the 2008 season, according to Keith Collins, chief economist with the U.S. Department of Agriculture.

Strong grain and improved soybean prices reduced cotton plantings 29 percent to 10.85 million acres, the lowest area planted since 1989. The Southeast and Delta regions each cut cotton plantings by more than 30 percent and North Carolina, South Carolina, Virginia, Louisiana, Mississippi, and Oklahoma experienced reductions of 40 percent or more.

Reduced acreage and production are projected to keep total cotton supplies in 2007/08 about unchanged from the previous year. With the prospect of stronger exports due to rising world demand, ending stocks are projected to decline about one-third to 6.4 million bales.

Given prospects for continued improvement in prices and returns, foreign production may increase in 2008/09, especially in Brazil and India. However, rising cotton prices likely will not be sufficient to attract acreage back to cotton production in the United States, given the continuation of very favorable returns for corn, soybeans, peanuts and wheat. A decline in cotton acreage in 2008, could be as high as eight percent, according to Collins.

While soybeans took a big acreage hit in the Midwest, in the upper Southeast acreage remained fairly stable. The loss of corn to early season freezes and drought and the continued favorable price of soybeans and wheat may lead many growers to plant winter wheat and double-crop with beans next spring.

Though soybean rust made its way through the Carolinas and Virginia by late October, infections were light and virtually all the soybean crop was past the growth stage of being at risk for yield loss from the disease. With three years of study now completed without serious losses to rust, it is likely the disease will not be a factor in limiting soybean acreage in the upper Southeast.

In the upper Southeast, North Carolina produces over a million acres of soybeans annually as does Kentucky to the west. Virginia and South Carolina each produce about a half million acres annually.

Nationwide, high corn prices relative to soybeans caused soybean planted area to drop by 16 percent to 63.7 million acres this year. Lower planted area, combined with slightly lower yields, is forecast to lower soybean production to 2.6 billion bushels, down 19 percent from last year’s record production.

Total soybean supplies in 2007/08 are projected to decline about 13 percent from last year’s record, as high carry-in stocks partially offset the decline in this year’s production. The farm price of soybeans is forecast to average a record $8.35 per bushel for the 2007/08 marketing year, compared with $6.43 last year and the previous record high of $7.83 in 1983/84.

The euphoria over ethanol production and to a lesser degree biodiesel production played a role in increasing interest in corn and soybean production in the Southeast, primarily due to improved prices. U.S. biodiesel production continues to rise, setting new production records each month.

Twenty percent of 2007/08 soybean oil production is expected to be used to produce about 580 million gallons of biodiesel. This compares with only 8 percent of soybean oil production being used for biodiesel in 2006/07 when about 200 million gallons were produced.

Similar to ethanol, biodiesel profit margins are eroding due to sharply rising soybean oil prices. Soybean oil is the feedstock for 85-90 percent of domestically produced biodiesel. The price of soybean oil has increased more than 40 percent over the past year causing biodiesel returns above soybean oil costs plus other variable costs to decline from around 80 cents per gallon to near zero.

Wheat acreage increased in 2006-2007 by more than 150,000 acres in the Southeast. Moderate yields in the Southeast due to drought and in the Midwest due to flooding promises to keep wheat prices at or above 25-year highs. The end result of record high wheat prices will likely be more wheat, and subsequently, more double-crop soybeans in the Southeast.

Nationwide, wheat acreage, which had been trending downward over the past 25 years, increased by over 3 million acres to 60.3 million, the highest since 2003. U.S. wheat production is estimated at 2.1 billion bushels, up from 1.8 billion bushels in 2006.

Driven by high wheat prices and lack of success growing corn, many growers in the Southeast are likely to look to wheat as a primary crop.

In addition, contracts on 2.5 million acres enrolled in the Conservation Reserve Program expired on September 30, 2007. Though the bulk of these expiring CRP acres are located in wheat producing states, significant acreage in the Southeast may well go into wheat.

The USDA’s Collins says, given the current outlook for wheat prices next summer and the amount of expiring CRP acres, wheat area is expected to increase 5 to 7 percent in 2008, to around 64 million acres.

The rapidly developing vegetable industry in the upper Southeast took a direct hit from the Easter 2007 freeze, but most growers were able to replant. Most all the vegetable acreage in the region is irrigated, so the drought and heat played a less significant role in production, compared to dryland row crops.

Watermelon, cantaloupes and most vegetable crops fared well.

In 2007, grower prices through October are up 6-7 percent from a year earlier and retail prices are up about 4 percent.

Optimism among peanut growers in the Southeast is particularly high in part due to a continued decline in stocks due to the drought. Peanut contracts of $500 per ton have reportedly been offered in Georgia, though few have been accepted.

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