Storm Impacts US Corn Market

A derecho wind storm swept across the US Midwest on August 10, affecting millions of cropland acres in Iowa and surrounding states. At the same time, the western part of Iowa experiences a drought. The storm caused and/or will cause significant local/regional price volatility, quality issues, and storage challenges for this year’s Iowa corn crop. Local and national impacts vary greatly due to large stocks and bumper corn crops in states bordering Iowa and beyond. The derecho and the ongoing drought have put a bottom in the market and point to higher corn prices than the USDA’s projections for the 2020/21 crop year.

Derecho Crosses the Entire US Corn Belt

On August 10, a derecho storm ripped across the Midwest, travelling 770 miles in 14 hours from South Dakota to Ohio. The worst damage was reported in Iowa, where the USDA reported that 57 counties, representing 14.0m acres, incurred crop damage. Producers with multi-peril and green snap (GS) crop insurance will be paid for covered losses, and non-insurable crops may be eligible for assistance under the USDA’s Non-insured Crop Disaster Assistance Program, which will help producers recover financially.

Satellite imagery can give a perspective on the scope of damage, but not actual production loss data (see Figure 1). The USDA will resurvey harvested acres in Iowa for the September 11 Crop Production Report along with the usual objective yield survey.

Figure 1: Satellite imagery before (left) and after (right) the derecho (Aug 2-8 and Aug 16-22)

Figure 1_Satellite images

Source: USDA 2020

Local and National Impacts Differ

The focus in this article is on corn rather than soybeans, as the corn crop appears to have sustained the most damage. In Iowa, the damage levels vary widely and are hard to assess. Damage reports from other states of the Corn Belt are minimal compared to Iowa. Private and public estimates range from 2m-3m acres of corn affected, with average county yield losses of up to 50%. Below scenarios show the potential magnitude of damage. It seems likely that Iowa’s yield (estimated by the USDA in August at 202bpa) will be cut by at least 5%, to below 190bpa, but maybe even by 10% to below 180bpa, with the harvested acreage likely being cut by 300,000 to 500,000 acres. This results in an estimated crop reduction of at least 200m bu, but potentially up to 400m bu. On a national level, this presents ‘only’ a 1%-3% loss, but for the state this would be 8%-15%.

Table 1: Iowa derecho storm damage scenarios for corn

Table 1: Damage scenarios

Source: USDA, Rabobank 2020

The derecho storm kicked off a late-summer price rally, which has been exacerbated by expanding drought across the Midwest. The derecho impact on price, and the national supply and demand picture, would be greater if US corn stocks were closer to 1.0bn. However, there is a substantial buffer given large US carry-in stocks of 2.2bn bushels. In August, the USDA projected 2020/21 ending stocks at 2.756bn bushels, with a record national average yield of 181.8bpa. Still, the USDA’s August stock and yield estimates are much too high given the storm and drought damage, and the likelihood of continued strong US export demand resulting from tighter supplies in other exporting countries and strong Chinese demand.

Supplies are rebounding in the eastern Corn Belt after last year’s record prevent plant acres. The USDA projects that five states will have record yields in the peripheral Corn Belt, including Minnesota, South Dakota and Wisconsin, which will offset some of Iowa’s losses and keep prices in check. Nebraska and Kansas were projected by the USDA to see bumper crops on high yields and acreage.

Derecho Storm Will Have Long Tail

While the national impact of the derecho storm is limited to a 1%-3% production reduction, there are local and regional impacts and implications that need to be recognized.

- Grain storage – it is estimated that 57m bushels of commercial grain storage was lost due to the storm in Iowa out of a total licensed grain storage of 3.6bn. The cost of repair and replacement is estimated at USD 300m. Damage to on-farm grain storage is unknown. This will create localized storage challenges for farmers during harvest, but with crop losses outpacing storage losses we do not anticipate this to result in significant harvest price pressure due to crops that cannot be stored.

- Basis – Following potential local storage challenges, wide basis values may be the norm in some areas this fall, as corn will be searching for a home. However, as the crop year progresses, Iowa basis and basis values in neighboring states will appreciate, as Iowa livestock farms and processors look further afield to procure corn.

- Long difficult harvest – Downed corn will make it a difficult and drawn-out harvest, which may counter some the wide basis values, since corn will not be coming to market all at one time.

- Grain quality – Downed corn that is harvested may have quality issues from fungus, low test-weights and high moisture levels which may make it difficult to market, and producers may see large discounts.

- Large corn silage supplies – There’s a high probability of more corn silage harvested this fall, which will create a cheap feed source. When cheap feed is available, potentially more cattle will be fed, which would be negative to cattle prices.

- Farm inputs – With downed corn not harvested and/or dead plants left in the field, nutrient levels in the soil potentially change, since nutrients went unused. This can reduce next year’s nutrient requirements and fertilizer purchases.

- Marketing – The carry-in futures market and the high probability of appreciating basis values into next year create a good marketing opportunity to store grain for later sale at a higher price for producers and grain merchandiser alike.

- Policy changes in long-run – Multiple severe weather-related crop issues in a row in the US and other regions of the world might drive further policy changes on a local and a global level in the long-run, to mitigate climate change impacts and to preserve land and water.

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