"Dry conditions are expected throughout the Corn Belt for the next 7 to 10 days." -Allan Curtis, climatologist with the Midwestern Regional Climate Center
The heat burning up the country right now is due in part to a persistent high pressure system, also called a heat ridge or dome, which parked itself over the mountain west, and has now shifted east into the Midwest and Southeast. The system is unfortunately stuck in place, because of a slowdown of the North Atlantic Oscillation, a climate pattern that pulls weather patterns eastward across the country.
This "blocking" of the Atlantic has caused the jet stream, which normally ferries air from west to east across the United States, to buckle and trap heat in the Midwest and Southeast. Dry soils, in part a product of the dry winter, exacerbate the heat.
Corn crops in the severe drought areas of southwest Indiana and southern Illinois are already being plowed under [Drought taking toll on Hoosiers]. Indiana reports the worst corn condition with only 19% rated as good to excellent. Illinois corn is also in rough shape, with only 26% rated good to excellent. Springfield Illinois (104F) and Indianapolis Indiana (101F) are forecast for Thursday to record heat last seen in 1934.
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In the areas still up in the air, farmers are spending heavily for diesel to pump irrigation. There is nothing in the July forecast (see second chart) that promises to save this crop. The Atlantic and Gulf of Mexico are completely quiet as far as a tropical rainmaker storm. With day after day of heat and no rain ahead, I think you can stick a fork in it. To track this story in real time follow crop weatherman at Tweeter: @BAndersonDTN.
source USDA Drought Monitor
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Like the natural gas bust, the impact of this is hardly mentioned as a problem. And I am not just referring to a huge food prices spike for Joe Sixpack. Farming has become more a function of investment types, who have driven up farmland prices as bond substitutes. According to Iowa State the mix of buyers in recent years has been 26% investors and funds, and 74% traditional farmers. The caveat is that "traditional" farmers have become large corporate types.
Clearly a farmer with a windfall crop profit might be inclined to buy farm land as opposed to parking in a sub-1% bank deposit. Accordingly, the traditional farmers have used the solid profits of the last few years to pay up for more land, as opposed to investing into farming operations and equipment. US farm capital expenditures have been modest, even as land speculation has not. This is just one more example of the effects of extreme low interest rate environments and bailout economics: encouraging participants to "put money to work" and ignore risks (moral hazard). The risks of farming have arrived in spades this summer.
Although a debt crisis threat here doesn't seem to be the primary risk, one must wonder what farmland should trade at once a bad crop is priced in. Would the subsequent price discovery make $2500 an acre, just one more parabolic bubble? What would be the investment appeal of parched Illinois farmland with a wiped out crop? Most certainly, the income ability of the buyer (farmers) to support inflated farm prices would be greatly diminished.
Creighton University follows rural Main Street sentiment, which is impacted by ag and energy patch activity. In May this index dropped modestly (see chart 2). The peak in farmland was put in during the first quarter and was starting to rollover through May (see chart 3). The farm equipment sales index decreased significantly to 54.7 from April's 65.1. All this was well before the sudden impact of the drought was felt. As recently as June 3, the corn crop was 72% rated good to excellent, and this week it was 48%. This is the worst reading since 1988. The run down on other grain crop conditions can be found here.
Source: Kansas City Fed
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On a similar connecting-the-dots vein, Blackstone (BX) gets into the residential landlord business, buying up $250M worth of foreclosed single-family homes with the intention of renting them out, according to sources. The firm joins what can now be called a mad rush of deep-pocketed investors trying to take single-family rentals out of the mom-and-pop category and into a major asset class. The key here is the cap rate. If it is 5-6% that doesn't really cover the hassles, depreciation, and other risks of land-lording.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in TSCO over the next 72 hours.
