Drought Felt Through Entire Industry – Global Economy Could Take a Hit

 

 

 

 

 

 

 

By: Erin Oswald

Recently, I had the opportunity to meet with Financial Officer, Kelley Johansen, of Farm Credit Services of America located in Columbus, NE. The majority of our discussion revolved around the topic most farmers and Midwest citizens find themselves conversing about: the current drought. Our discussion tied back to grain prices at every point of interest. Many markets including the swine industry are tied to this year’s yields.  Kelley Johansen noted that a lot of work has been done to build the current demand for the swine industry. He is concerned that lacking yields will kill that product demand. I agree with his concerns. He suggested viewing the situation macro economically. With such high grain prices, swine production will be forced to reduce production. Mr. Johansen noted that in the past, many agricultural markets used to be stable as a unit. Now, however, the grain markets pull the swine industry along.

Ph. D Student in the Department of Economics at the University of Nebraska in Lincoln, Hanna Hartman, offered this macro economical breakdown of the situation: “Of course with a drought comes a decrease in the supply of commodities, which has impact not only on the crop markets but livestock and other products as well. Therefore, we will see many price increases as the supply of a key input (corn, for example) for many products decreases. Suppliers will likely pass along a portion of the increase in input prices along to the consumer, which will increase the price of many of the products consumers purchase. The increase in input prices for supplies of goods that rely on commodities in short supply because of the drought will likely cause those suppliers to provide less of their product. The demand will increase in markets of goods that are substitutes for goods affected by the drought, causing an increase in prices of these substitute goods as well. However, because we engage in trade, we will be able to import some of the goods (corn, for example) to help minimize the effect the drought has on domestic goods. But the U.S. exports commodities, too, so there will be an overall supply decrease in the world market for some commodities, which will drive up the “world price” for these goods. Not only will U.S. consumers experience an increase in prices, but also many areas worldwide may experience an increase in prices due to the drought here. On a positive note, at least a larger percent of U.S. farmers have crop insurance and insure a larger portion of their crop relative to the last time we’ve had drought conditions this severe and suppliers who haven’t had the drought influence their goods will receive higher prices for their goods. Hopefully, next year’s crop will fair better and the increase in prices that we will likely experience this year will fall when there is a larger supply (relative to this year’s supply) of commodities next year.” This explanation can be simply followed even if economics are not your forte.

I will personally continue to carefully observe worldwide economics and its impact on the present and future of the swine industry. From Farm Credit Services, Kelley Johansen recommends that you know your bottom line. Figure out your costs down to the penny and put yourself in a financially stable position. He noted that many producers estimate their bottom line and underestimate. Risk management is extremely important at this time and putting too much on the line with no price protection could cause extreme losses. Producers need to be aware of their breakeven price and overall financial position.

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