U.S. Farm Economy Reverses as Drought Impacts Persist

The long reach of last summer's devastating U.S. drought has reversed the flow of the mighty Mississippi River - for corn, at least, with grain-laden barges beginning the rare movement north to Midwest ethanol plants from southern farms.

The shipments come as the U.S. faces a 17-year low in corn supplies by the end of the month due to the historic drought, which slashed harvests and sent grain prices to record highs a year ago.

The tight supply is upending the country's tradition-bound agricultural economy, which is holding its breath in the weeks before an expected record harvest begins some time next month following a wet spring and summer.

Grain, which typically flows south on the river to export markets, is heading north from states like Louisiana and Arkansas, where farmers begin harvesting earlier than their Midwestern counterparts. Normally, much of that grain would ship overseas, but after prices climbed following the drought, exports are set to drop to a 41-year low.

Ocean-going vessels are reversing course too, with record U.S. grain imports expected from countries like Brazil and Canada as U.S. processors like Ingredion and Pilgrim's Pride seek cheaper corn.

"What's really changing here is the flow of corn," said Brent Baker, a vice president for John Stewart & Associates, a trading firm. "This is unprecedented."

The 2013 corn crop is expected to come in at a record 13.8 billion bushels, up 28 percent from last year. If that happens, supplies will build to an eight-year high, making the famine-to-feast reversal the largest annual swing in more than half a century.

But even with a big harvest coming, Mother Nature has added a unique twist: A historically wet spring delayed planting by weeks, and cool wet weather that followed means farmers expect a delayed harvest.

Instead of drought, this year farmers are worried about an early frost that could wipe out their crops--a new anomaly that would delay a return to normalcy for the farm economy.

"A lot of strange things happen after a drought that has a severity to be the worst one in 80 years," said Rodney Weinzierl, executive director for the Illinois Corn Marketing Board.

Roughly 1,000 barges carrying newly harvested southern corn will likely travel north by mid September, according to Baker. A barge trader interviewed by Reuters confirmed that estimate, which would be up about ten-fold from last year.

Demand is intense as Midwest ethanol producers and processors do not expect local farmers to harvest much corn until early October, weeks later than usual.

"As fast as you can move it from the south to the north, we're shipping it north," said Ryan McClanahan, a merchandiser for Commodity Specialists Company, a grain trading and marketing company. "It's the big thing right now."

Jeff Duckworth, a corn buyer for ethanol maker Aventine Renewable Energy in Pekin, Ill., said harvest cannot come soon enough. There is "just barely" any old-crop corn left in local markets, Duckworth said.

Help is on the way. In Louisiana, for example, the harvest was 14 percent complete as of mid-August and is expected to total 122 million bushels, up a third from last year, according to the U.S. Department of Agriculture.

NORTHWARD BOUND

The reverse flow northward is being primed by high bids for corn in the Midwest cash markets. A grain elevator in Lake Village, Ark., along the Mississippi River, was bidding $4.41 for first-week August delivery, while a processor in Cedar Rapids, Iowa, was offering $6.01 - a difference that is more than enough to cover transportation costs form south to north.

Demand on the Mississippi for corn is pushing prices to a point that poultry feeders are switching to wheat, which is less expensive. Corn prices spiked more than wheat prices did after last summer's drought.

"Usually our poultry feeders would be hollering for corn, just clamoring for the stuff, but we just aren't seeing that," said Shep Bickley, owner of a Cain Agra grain elevator in Arkansas.

Despite the high corn price, demand on the river in the Deep South remains strong. "Our local river terminal was bidding up everybody by far - blowing the door off the (poultry) feeders," said Bickley.

American Commercial Lines, an Indiana-based barge company, has orders to ship southern corn through the end of August to locations on the Ohio, Illinois and upper Mississippi rivers, and into St. Louis, spokeswoman Kim Durbin said.

Barge companies are equipped to carry grain north because they usually ship fertilizer from the south to Midwest farms. Grain elevators, which are more accustomed to loading corn than unloading it, are having to adapt.

The Illinois and Ohio rivers, which flow through the areas worst hit by last summer's drought, have already seen increases in upriver barge shipments of food and food products.

Northbound traffic passing through the LaGrange lock, the southernmost on the Illinois River, was up 9.5 percent from a year ago through the end of July.

The U.S. Army Corps of Engineers, which manages the lock system, said the volume moving upriver through the JT Meyers lock on the lower Ohio River, the lock nearest its confluence with the Mississippi, was up 4 percent from a year ago as of the end of July.

IMPORTS SURGE

Coastal markets are adjusting to their own sense of dislocation.

Hog and poultry operations in the Southeast and along the East Coast have found foreign supplies cheaper than rail-delivered grain from the Midwest. Over all, the United States is set to import a record 165 million bushels in the year ending Aug. 31, a nearly six-fold increase from the previous year, according to USDA.

Wilmington Bulk LLC, a feed buying consortium of hog and poultry producers, has brought in more than 350,000 tonnes of mostly Brazilian corn over the past year, according PIERS, a company that provides trading data.

Pilgrim's Pride imported more than 175,000 tonnes through the port of Mobile, Alabama, between Feb. 8 and June 3. Rival producer Perdue Farms has imported smaller volumes into Norfolk, Virginia, the PIERS data showed.

The surge of grain imports led to record profits for the North Carolina State Ports Authority, which handled nearly 1 million tons of grain coming into the country at the Port of Wilmington in the fiscal year that ended July 30, said Laura Blair, senior director of external affairs. She was not able to provide data for prior years.

"The drought in the Midwest forced people to look at the supply chain and experiment with different ways to get grain where it's needed," she said.

The window is shutting quickly for South American exporters. With the southern U.S. harvest well underway, further import purchases are unlikely. Before the ships can make the two- to three-week sail from South American ports to the United States, cheaper new-crop prices will begin setting in.

Some yet-to-arrive cargoes will help bridge the gap to new-crop supplies.

The vessel Pos Aragonit is currently steaming toward the Port of Wilmington after loading grain in southern Brazil. The vessel Trans Pacific is at anchor off the Brazilian port of Paranagua and is scheduled to arrive at Wilmington by October.

Opportunity will dry up quickly for northbound shipments on the Mississippi River too. Once the Midwest harvest is in full swing, the agricultural industry will resume buying local corn.

"We're trying to bridge the gap," Baker said.