It is the ultimate good news, bad news scenario. The worst drought in North America since the Depression has caused prices for many farm products to leap to record heights—but few farmers will reap what they have sown. Weather reports have jumped to the lead item on local radio and television stations in places as disparate as Calgary, Des Moines and Wichita. The dust bowl has returned on both sides of the border, threatening to ruin tens of thousands of farmers. And if the drought persists throughout the summer, it will affect all of us in varying degrees.
A lingering drought that devastating could end up making our mortgages cost more, along with many food items. It may skewer the world economy and stock markets and may also enhance the chances of success for the more interventionist Democrats in the U.S. presidential election.
In 1987, agriculture represented about $11.8 billion, or 3.1 per cent, of Canada’s gross domestic product. But much more economic activity, from breweries and canneries to fertilizer companies and farm equipment suppliers, depends upon reasonable prices. These days, the only ones making hay are speculators and pit traders on commodity exchanges. Among other commodities, soybeans have increased dramatically in price. “Beans in the teens” has been the recent rallying cry among Chicago Board of Trade pit traders who have driven soybean prices into the $ll-to-$12-a-bushel range, up from $7.50 at the beginning of the year. And because soybeans are used in a variety of products, including animal feed and manufactured foods, more expensive soybeans mean more expensive meat, margarine and other grocery items.
Trading volumes have also jumped on the Winnipeg Commodity Exchange. Some 365,000 futures contracts on items such as wheat, barley and rye, worth $1.9 billion, traded in June in Winnipeg—the highest volume on that exchange since the late 1940s—as investors, apprehensive about possible shortages, scramble to buy commodities. Volumes and volatility have been so great that exchanges on both sides of the border have changed rules as a result of the changed circumstances. To slow down speculators, deposits on contracts for soybeans have been dou-
bled. And to accommodate the volatility, the amount by which prices are allowed to swing on a given day before exchange officials shut down trading in that commodity has been increased in the case of soybeans and other commodities.
Commodity exchanges are crap shoots—but they are an essential tool for farmers and food processors alike. But playing the game successfully depends mostly on luck and timing, and only a few speculators have won. Typical is Lloyd Durflinger, president of an Iowa grain elevator. Since 1982, because of a glut of corn supplies, he had stored 300,000 bushels of corn in an unused airplane hangar. He sold in February when prices were steadily holding at about $2.40 a bushel. Now, corn fetches $3.90 a bushel, and Durflinger would have been $450,000 richer if he had hung on.
Naturally, such price jumps also af-
feet the profit outlook and operations of the continent’s food processing companies, which run the risk of passing along enhanced costs but losing customers if they do so before the competition does.
At the recent annual meeting of Canada Packers Inc., Canada’s largest meat processor, its president, James Hunter, said that the crisis clouds 1988. Rising feed prices could hurt meat operations, and concerns about the canola and soybean crops may cause severe shortages, affecting the company’s edible oil products such as margarine and cooking oils. And brewery executives are expressing concerns about a barley shortage.
When it comes to King Wheat, however, the effect has been mixed. About 75 per cent of the U.S. crop is unaffected because it is being harvested nowso-called winter wheat grown in the southern half of the continental United States. But up to half of the wheat crop in Canada and the northern tier of the United States is threatened even if rain falls during this month and next. Unfortunately, the long-term
forecast on both sides of the border is for hot and dry weather.
Lome Hehn, president of Canada’s United Grain Growers Ltd., predicted in late June that the country’s wheat crop would fall to about 30 million tons overall in 1988-1989 from 46 million in 1987-1988. And the Canadian Wheat Board, a federal Crown corporation that is the sole export marketing agency for Prairie-grown wheat, oats and barley, estimates that exports will fall below 22 million tons from 30 million. This is a disaster for certain regions; the Saskatchewan Wheat Pool, for one, estimates that the drought may cost its farmers a minimum of $1 billion.
As the drought lasts, prices for all commodities will likely increase, some more than others. In the case of corn, for one, shortfalls will only eat into huge surpluses. Washington estimated that the U.S. corn crop could fall to 6.5 billion bushels this year from 7.3 billion in 1987—and still leave 4.1 billion bushels sitting in storage around the world. The result is that the price of corn, which directly affects the cost of meat, has increased—but not as dramatically as have other prices. And to dampen corn price jumps, the U.S. government has been steadily releasing 20 million bushels of corn a day from its stockpiles.
There is little doubt that consumers will begin to feel the pinch unless the rains come. Washington economists predict that the drought alone will result in a one-per-cent rise in inflation in 1989 (which, taking into account that U.S. inflation is now at about four per cent, actually represents a 25-percent jump in the rate). This, in turn, will put added pressure on interest rates, pull stock markets down and possibly spark declines in the value of food processing company stocks.
The drought is also a political wild card as both the Canadian and U.S. governments scramble to shore up farmers and continue to pledge export subsidies. Even so, U.S. Vice-President George Bush, certain to win the Republican nomination at the party’s convention in August, may find himself accepting his archrival, Kansas Senator Bob Dole, as his presidential running mate to keep Republican support in the farm belt. Prime Minister Brian Mulroney may postpone his election bid until it pours. There is nothing like hard times to make an electorate mad enough to vote for radical change for change’s sake.
The drought is a political wild card as both the Canadian and U.S. governments scramble to shore up farmers
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