As forecasts called for 100-degree weekend temperatures and scant rain over much of the Midwest, the drought-raked region braced for a federal crop condition report Monday that's expected to show the toll is climbing.
Week by week since June, updates have pared what once promised to be a record harvest. Corn and soybean prices have spiked for five straight weeks, tearing through record highs Thursday and Friday.
Concerns are rising across the agricultural sector, a $400 billion powerhouse that has boomed as much of the U.S. economy shuffled through an ersatz recovery.
Grain growers and crop insurers face a difficult season, but generally not financial disaster. Livestock ranchers and ethanol producers may be the biggest losers.
Grain Grain farmers entered 2012 on strong footing, says Chris Hurt, agricultural economist at Purdue University. Years of high prices had boosted farm incomes to record levels. Rising land values drove the sector's debt-to-asset ratios to their lowest since 1960.
But drought damage led the Agriculture Department on July 16 to expand its lowest-tier assessment of "poor to very poor" corn acreage to 38% vs. 30% the prior week. Nearly a third of the soybean crop got the same sad grade. Wheat has been less affected, but prices have also spiked to record highs.
Many experts expect Monday's report from the National Agricul tural Statistics Service to confirm even more damage. Further reductions could pit livestock farmers vs. grain processors and ethanol producers in a struggle for dwindling supplies.
Yet most grain farmers are looking at very survivable scenarios, Hurt says. Indiana, the hardest hit of the big corn states, faced an overall 28% crop loss as of last week. But prices have shot up 50% since the start of June. A farmer could lose half of his crop and still have a good year.
"It could be that revenues, on average, will not be as heavily affected as what the general thought is," Hurt said.
Farmers who hedged portions of their crop at lower prices are more at risk. A farmer who hedged a third of his crop at $5.50 a bushel and lost another third to drought faces a tough year. Those who sold forward 50% or more of their crop may take significant losses.
Several farm suppliers have done well. Equipment maker Deere & Co. (DE) rose 16% from June 1 and mid-July, then eased to 6% above its June 1 price. Irrigation equipment maker Lindsay (LNN) has bolted 31% since June 1. Seed producer Monsanto (MON) is up 15%.
Insurance U.S. farmers paid the highest cost ever to put this year's crop in the ground, Hurt says.
Many farmers risk their entire net worth each year. Crop insurance offers a vast safety net against disaster. It isn't cheap and doesn't cover all losses. But it generally keeps farms from failing and lets them invest in the next season's crop.
Multiperil crop insurance represents only 1% of the property/casualty industry's net annual written premiums. The insurers tend to be top-rated, large, globally diversified operators with solid balance sheets, a July 18 report from Fitch said. They include Switzerland's Ace Ltd. (ACE), Cincinnati's American Financial Group (AFG) and Germany's Allianz (AZSEY) . Shares of all three have dipped since the start of May.
Endurance Specialty (ENH) is most exposed, with crop insurance 25% of its net premiums written, Fitch says. Its stock is off 16% since May 1.
Livestock In east Texas, ranching conditions actually improved this year, while west Texas stayed parched.
Last year, "in Texas, it was our driest year on record," said David Anderson, a livestock economist with Texas A&M's AgriLife Extension Service.
Dairy farmers and beef ranchers had been reducing herds since grain and feed costs upshifted in 2006. Last year's drought accelerated the culling to record levels.
This year's expanded drought is propelling feed costs and withering grassland in the Great Plains and Corn Belt regions. Those pastures had provided a market for Texas and Oklahoma ranchers selling beef and dairy cattle, Anderson says.
Now ranchers are liquidating herds in more states. Prices for calves sold into feedlots, to be fattened for sale as beef, have sunk.
Unlike crop farmers, no insurance backstops livestock producers. The likely outcome is an increasing number of failures, Anderson says, and an accelerated downsizing of the U.S. beef and dairy trades.
"We've got the fewest cattle in the U.S. in 60 years," he said.
Fertilizers U.S. fertilizer buying is done for this year, says Roger Elmore, an extension corn specialist at Iowa State University. Most drought-damaged crops will be mowed and turned back into the soil. That generally means more nutrients left in the ground, pointing to less fertilizer demand in the 2013 growing season.
But the southern hemisphere is in its fertilizer buying season. The U.S. is the world's leading corn exporter, so the drought and soaring prices are rippling across the globe, says Oliver Hatfield, director of fertilizers with Integer Research in London. That could boost fertilizer sales. But several production facilities are set to come on line in Saudi Arabia and North Africa.
"There is a risk that there will be oversupply," Hatfield said.
Ethanol "Ethanol producers came into 2012 on a high," said Brian Jennings, executive vice president with the American Coalition for Ethanol.
Oil and gasoline prices were high. Record-setting corn plantings led to forecasts for low input costs.
But oil prices fell abruptly in May, forcing some ethanol plant shutdowns. The corn price spike, begun in June, tightened the vise.
Valero (VLO) in June idled two facilities in Nebraska and Indiana with annual capacity of 110 million gallons each.
The drought may shake out some weaker players. But, in general, Jennings said, "Ethanol producers are on better footing than they were (during the price spikes) in 2008."