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A Food Report

by Richard (Rick) Mills Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

Because of the worst drought since 1988 the U.S. Department of Agriculture declared a federal disaster area in almost one-third of all the counties in the United States – more than 1,300 counties covering 29 states, the largest disaster declaration ever made by the USDA. Only in the 1930s and 1950s has a drought covered more land.

The United States Drought Monitor shows 88 percent of corn, and 87 percent of soybean crops are in drought-stricken regions.

This map show the counties affected:

"We just had a crop report today, which indicated a significant reduction in corn production as well as bean production, lower forecast for wheat, soybean, soybean oil, soybean meal, and corn, lower forecast for milk, beef, pork, broilers, and turkey. And it’s obvious that weather is having an impact on the estimates of crops. Despite the fact that we have more acreage planted this year, we still are looking at significant reductions, and despite the fact that we may even with the corn estimates, as they have been reduced, would still have the third largest crop of corn in our history, nearly 13 billion bushels, and a very large soybean crop. We need to be cognizant of the fact that drought and weather conditions have really impacted and affected producers around the country." ~ Agriculture Secretary Tom Vilsack

Corn, the biggest ingredient in livestock feed, is a mega-crop, there are more than 4,200 different uses for corn products;

Adhesives, aluminum, aspirin, clothing starch, cosmetics, cough syrup, dry cell batteries, envelopes, fiberglass insulation, gelatin capsules, ink, insecticides, paint, penicillin, powders, rugs and carpets, stamps, sweetener’s, talcum, toothpaste, wallpaper, vitamins, processed and fast foods and of course as fuel – ethanol.

Extreme heat and drought conditions hit the Midwest just as the corn crop was suppose to pollinate – the key yield determining growth phase for corn. Crop ratings have fallen to their lowest level in 24 years – the most recent estimate pegged the crop as just thirty-one percent of the U.S. corn crop in good or excellent condition as of July 15, the least for the date since 1988.

Cattle Country

The U.S. beef herd has shrunk to its smallest since 1956.

"Feed costs account for about 40 to 50 percent of total costs of production, and when a rancher or poultry producer or dairy producer is faced with higher feed costs it’s less profitable to produce that animal. Often times you will see animals brought to market before they reach full weight. In dire cases, producers will liquidate the entire herd and don’t expand as much as they might have." ~ Joseph Glauber, chief economist at the U.S. Department of Agriculture.

The drought in the Midwest comes on the heels of one last year in the southern Plains, the heart of Texas cattle country – the 11 months through August 2011 were the driest since at least 1895 in Texas.

A record 54 percent of pasture and rangeland is in poor or very poor condition. The drought has destroyed a lot of pasture, and the lack of rain has hit hay and alfalfa production hard. Ranchers normally start feeding their animals hay in December or January (as cold temperatures kill the grass) and stop in late spring as grass becomes available in pastures.

This year many ranchers haven’t stopped feeding hay because what grass was in their pastures withered.

Ranchers are again selling off part of their herd. In the week ending June 30, 52,700 cows were slaughtered. That’s a three percent rise higher, year over year, then during the peak of the Plains drought. Farms are sending young cattle to feedlots earlier than normal and slaughtering more beef cows because pastures have no grass and hay prices have more than doubled.

Corn prices are up so much feedlot margins are drastically reduced or non-existent, feedlots buy year-old animals that weigh 500 to 800 pounds – these young animals are called feeders. They are fattened on corn for four or five months until they weigh around 1,200 pounds, then they are sold to meatpackers.

Fewer cows today means fewer beef and *dairy cattle tomorrow.

Economic Outlook Overview: U.S. Beef/Cattle Industry, Kansas State University

Short term meat prices might drop because of the extra cattle (and hogs and **chickens) going into the meat market. Unfortunately when those cattle should have been sold there’ll be no cattle to sell, so meat prices will go up, a lot, and stay that way for a considerable time, until the herds are rebuilt.

*Expect dairy prices to skyrocket up, not only because part of the herd is being sold off but, if feed is of poor quality dairy production goes down, if there’s less milk given per cow and its of lower quality it will, for example, take more milk to make the same amount of cheese as from higher quality milk.

** Poultry meat and eggs will see the earliest price increases since these shorter lived birds are raised almost entirely on corn.

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Richard Mills is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, and Financial Sense.