2012's Double-Whammy Of Bad Weather Could Slam Midwest Economies For Years

farmer cropA farmer stands among some of his corn crop in Michigan

Photo: AP Images

Drought and extreme heat have devastated farms in the Midwest, sending crop prices surging.Images of dry, cracked grounds, yellowing corn leaves, and cattle suffering under the extreme weather conditions have permeated the press.

Over 70 per cent of the Midwest was in some stage of drought in the week ending July 17, according to the Drought Monitor,

Jim Byrum, president of the Michigan Agri-Business Association, says the lower corn crops have already pushed farmers to more aggressively plan for wheat this year and the next.

What’s more, with corn yields perishing, livestock feed is going to get expensive and many livestock feeders will eliminate breeding herds. Byrum says many will choose to take their sows to the market instead, and rebuilding the breeding herds will take time.  

Earlier today, Morgan Stanley’s Hussein Allidina wrote that the feed reduction would cause the largest-ever decline in livestock herds. He wrote that cuts in feed demand would see a 60 per cent year-over-year (YoY) reduction in chicken production, a 48 per cent reduction in cattle, and a 40 per cent reduction in pigs.

Michigan’s “double whammy”

Michigan had an unusually warm March this year, which caused the fruits to bloom early and get destroyed by April frost, said Tim Boals, Great Lakes Regional Manager for Wilbur-Ellis. This ruined cherries, apples and peaches that grow in the region.

Naturally there was some optimism for the commodity crops, namely corn, soybean and wheat, said Byrum, but it wasn’t to be. 

There are spots of Michigan that haven’t seen rain in 45 – 60 days and there’s been a 50 – 70 per cent reduction in some corn fields. The sporadic rain that has come through the last couple of days hasn’t done much. “Even if we get a quarter inch of rain, its gone immediately with this heat,” said Byrum.

The extreme weather has already pushed farmers to chop their corn for feed, and many are concerned they won’t be able to make their grain obligations. 

“I’ve been in this industry a long time. We saw some droughts in the 1990s, 1998, but this is unprecedented, I have never seen it look this bad.”

Wider ramifications

All of this could have much wider implications for Michigan’s economy. For one the state attracts a lot of migrant labour to pick fruits, which won’t happen this year. Typically, migrant labour moves in a pattern and they start in Michigan in mid-June according to Byrum. There is some concern that this labour might not come in in the future.

What’s more, children of migrant laborers attend schools in Michigan, which get their funding in part based on headcount. That could also be impacted by the lack of migrant labour.

Finally, companies like Boals’ Wilbur-Ellis, a distributor of agricultural products, animal feed and specialty chemicals, are likely to see their business impacted. As farmers lose their crop potential they start trying to reduce their costs and there is concern that there won’t be as much demand for fertiliser in the fall.

Despite the recent rainfall, the USDA has designated 39 additional states as natural disaster areas because of worsening drought conditions. And the drought is now covering the widest land expanse since 1956. “We will see the ramification and implications of this in years to come,” according to Byrum. “This is creating a three to four year problem.”

Don’t Miss: Photo’s Of The Drought That’s Devastating America’s Farmland >

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.