Drought Could Cost Farmers with Future Delivery Contracts

By CnAgri2012-06-29 19:57:34 Print

Drought conditions could hit farmers in the pocketbook in more ways than one, Purdue Extension agricultural economist Chris Hurt says. Not only could water-starved corn and soybean crops produce smaller yields and cut into farmers' revenues, but they also could force some growers who signed future delivery contracts with grain buyers to buy back some bushels they are unable to supply.

"We've been hearing of producers calling their grain managers and talking with them about the possibilities of dealing with these yield reductions," Hurt said. "Right now it's hard to say what will happen because nobody knows where grain prices are going to go."

With some parts of Indiana now nearing a month without significant rainfall and the critical pollination phase of corn either already started or about to begin, large crop losses appear likely for some farmers. Those losses would be especially painful for farmers who sold a large percentage of their anticipated corn crop this spring in forward cash contracts.

In forward contracts, producers promise to deliver a specified amount of grain to buyers well before their crops are harvested. In turn, farmers are guaranteed a set price for their grain, even if grain prices fall below that set price before their deliveries are made.

Farmers face a double whammy if the drought persists, Hurt said. On one hand, they could fail to produce enough crop to meet their contractual obligations. On the other, they could lose additional revenue if prices rise above their locked-in rate.

Hurt gave the example of a farmer who agreed to sell corn at $5 a bushel based on an anticipated production of 150 bushels per acre, for $750 in revenue per acre. If drought reduced the farmer's production to 120 bushels per acre and pushed cash prices to $6 a bushel, the farmer would deliver that smaller crop at the price agreed upon but then have to pay the buyer for the 30 bushels per acre the farmer was unable to supply. That undeliverable charge would be $30 per acre, based on the $1 per bushel more than the contract price the grain is now worth.

"That 120 bushels delivered would only generate $600 for the farmer," Hurt said. "Then, after the farmer paid the $30 on the non-delivered grain, they would have only $570 of revenue per acre, or $180 per acre less revenue than they had originally planned."

He urges farmers who are concerned that they have sold more bushels than they might produce to contact their grain buyers and discuss delivery alternatives.

With July corn futures moving prices to about $6.60 to $6.70 a bushel, old-crop cash corn should push past $7 per bushel, Hurt said. "If we go above $6.75 or $6.80 on July futures, then I think we've got a real shot at retesting the all-time highs at around $8."