CornI attended a talk by a few Iowa State University professors today. Every winter they travel the state talking about climate, crop, livestock and ag issues to a diverse audience. Here are some notes. 

For the last 800 years, there has been a drought every 18-20 years. We haven't had a major drought in the Midwest since 1988 and several indicators mimic 1987-88 conditions. A very smart climatologist with a proven track record stated there is a 70% chance of below average crop performance due to weather. If we escape a drought this year and next year, it will break a cycle that has held for 800 years, so the odds favor a drought soon. Current predictions call for a wet spring, which could hamper planting, and then a bone-dry summer, which could hurt yields. This isn't good for farmers, but could drive prices higher.

New genetics traits and water management techniques can help mitigate a drought somewhat, perhaps leading to 10-20% decreases in productivity, rather than 30-40% decreases that have been seen in past years. Therefore, farmers are likely to apply for higher levels of crop insurance, and those premiums are likely to be paid out in the near term. Insurers may take a hit after a few years of good returns because we've been mostly disaster-free. 
Demand for corn is high and it will continue to be planted in a large number of acres. Traditionally, farmers have planted corn and soybeans 1-1. That ratio has shifted to 2-1 and will likely stay that way for a few years. Bean prices are high, but they aren't high enough to sway farmers into planting more soybeans. Therefore I predict bean prices will rise into planting season, similar to the rise in corn prices last winter/spring.
Lower wheat, cotton and soybean carryover stocks will lead to higher prices in an attempt to buy acres, but will be unsuccessful. Farmers that do plant and get a decent crop will do well.
Several large index funds have deployed managers to the state, and I'm hearing that they are buying commodities as a hedge against inflation and to benefit from a presumed rise in the dollar by harvest time. South American soybean producers should produce well this year but be harmed by selling their commodities in weak dollars (they harvest in a few months, not in time to benefit from a rise in the dollar). Australian wheat should be much better after a disastrous drought last year.
The takeaway was that demand for commodities is going up for a number of reasons: biofuels, increased global consumption, etc. Supply could be harmed by a potential Midwest drought combined with already low stocks of key commodities. Prices of commodities, producers and processors are high and likely to go higher. This will be passed to the consumer and cause inflation in 6-12 months. Food has become relatively cheap over the last 40 years, perhaps even irrationally so due to a wide range of government programs and historically cheap energy. Now that energy prices and commodity prices are going up in conjunction, food will become much more expensive relative to income.





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