Last year's U.S. drought, the worst since the Dust Bowl, is delivering its final sting to major grains buyers like Archer Daniels Midland, Bunge Ltd and Cargill Inc, who are paying record-high premiums for dwindling supplies of last year's crops.
Premiums at the moment are as high as $1.75 a bushel above benchmark futures prices on the Chicago Board of Trade, which have been depressed by signs of a record harvest this coming autumn. The most active agriculture contract, December corn , hit a two-year low last week near $4.90 a bushel.
The residual effect of last year's drought has triggered an unprecedented bidding war for immediate supplies. Ethanol plants, soy processors and livestock farmers, unwilling to pay the lofty premiums, are cutting operations instead.
Making matters worse, a soggy spring delayed plantings of soybeans and corn, pushing back the likely arrival of new supplies by several weeks. The supply squeeze is set to peak next month when premiums could shatter existing record levels, inflicting even more pain on grain handlers.
"We will be on fumes come mid-August," said Joe Christopher, a grain buyer at the Crossroads Co-Op in Sidney, Nebraska, referring to scarce supplies of grain in a state that is still engulfed in moderate to extreme drought.
The biggest processors need hundreds deliveries each week of semi-trucks full of corn and soybeans, and not all shipments can be bought in advance.
At the trading floor in Chicago, corn futures have tumbled 16 percent since hitting a record last August, with nearby September corn settling on Tuesday at $5.51-3/4 per bushel. New-crop December dipped below $5 a bushel last week for the first time in 2-1/2 years.
However in Iowa, long the king of corn-growing states, a major processor owned by Cargill Inc was willing to pay $7 or more for bushels delivered this week. The price difference this month between existing grain and grain to be harvested later was the widest ever.
The corn "basis" in Cedar Rapids, Iowa, is a record-high $1.75 above futures, according to Reuters data, up sevenfold from 25 cents above futures a year ago.
The record gap reflects the clash between tight short-term supplies and expectations that U.S. farmers this year will harvest the largest corn and soy crops ever.
Soybeans are even tighter than corn, with U.S. stockpiles expected to fall to a nine-year low of 125 million bushels by the end of August. That amount represents just 4 percent of total soybean usage for the year, the smallest in 48 years.
CBOT July soybean futures touched $16.30 a bushel on Tuesday, the highest nearby price in nine months.
Failure to Ration
The industry already has seen as many as 15 ethanol plants and soy processors shut down since the start of the drought a year ago due to lack of supply or poor margins. Major units such as Bunge's soy processor in St. Joseph, Missouri, and Cargill's Lafayette, Indiana, plant have idled.
That much capacity has not been offline since 2008, when ethanol makers went bankrupt amid skyrocketing crop prices and a global credit crunch. But analysts say more shutdowns are needed to ration demand to avoid running stockpiles down to zero.
Some ethanol plants that stalled last summer are running profitably again as a surge in crude oil prices to two-year highs made the corn-based fuel additive economical again.
Buyers at soybean processors are willing to pay exorbitant prices for small amounts of the oilseed needed right now. But they don't want to purchase more than needed, because of the risk of owning over-priced product if prices crash as expected once harvest starts this fall.
"You've got a perfect storm brewing for a grain buyer," said Jim Gerlach, president of A/C Trading, a commodity brokerage in Fowler, Indiana. "From his standpoint, not much worse could happen to him. He's in a bad fix. Everything is working out to favor the market staying extended until the new crop arrives."
High corn prices have made wheat a more viable alternative. POET Biorefining bought some wheat this year to grind into ethanol. Poultry and cattle producers this year are expected to feed their animals record amounts of wheat, traditionally a crop reserved for human consumption.
Farmers Holding Out
It remains unclear whether high premiums may coax additional grain supplies into the market. Farmers who sold most of last year's diminished haul last summer, when futures hit record highs, can now afford to gamble with the remainder. Some may hold out, hoping prices will rise as the squeeze intensifies.
Prices for soybean meal, a key source of protein in feed for hogs and poultry, have soared above $500 a ton, prompting hog feeders to adjust rations to use as little as possible.
"Right now producers are doing as much to replace it, down as low as we can go, without reducing performance," said Gene Gourley, who raises sows in Webster City, Iowa.
Tyson Foods Inc and Smithfield Foods Inc have said they have imported corn and soybean products from South America for livestock. These imports only provide a small buffer for areas near ports in the southeastern United States. It is too expensive to ship supplies where they are most needed in the heart of the interior Corn Belt.
"What limits our imports is the fact a vast majority of our (soy) crush is away from the coast. So you have to import and then you have to move it in from the door, up to where the crush plants are. It's not cheap, and it takes time," said Anne Frick, senior oilseeds analyst at Jefferies Bache in New York.
Indiana dairy farmer Mike Yoder is buying grain on a weekly basis, hopeful prices decline as farmers and traders become more confident that frequent U.S. rainfall will bring a bumper harvest. Yoder sold 50 cows earlier this year after selling 85 of his milking cows last year to stop the flow of red ink and stretch feed supplies. He may have to sell more.
"I just buy it as we need it, hoping that as we get into July that we have good weather during pollination that it will soften that price a little bit. That's what we are counting on," Yoder said. "If something happens to that corn crop and prices stay in that upper-$6 and low-$7 range, we are going to sell more cows."