The Digest’s Special Report on Drought

Dire US media headlines abound: “Drought!”

What’s real, what’s hype, and what are the impacts?

More importantly, what alternatives does science give us now, and in the future, with more drought-tolerant energy and food crops?

The Reuters report could not have been more stark this week from a field in Illinois.

“We’re in a critical point, could be the beginning of the end,” said Dave Kestel, a farmer, in a Reuters report that ran yesterday. Kestel’s plants in Manhattan, Illinois, the news service reported, “are almost two feet shorter than they should be at this point in the season and the next two weeks are critical.”

A Yahoo report that ran last night and was in the Top Story feed this morning (July 6) brought more bad news:  “Just under 56 percent of the contiguous United States is in drought conditions, the most extensive area in the 12-year history of the U.S. Drought Monitor. The previous drought records occurred on Aug. 26, 2003, when 54.79 percent of the lower 48 were in drought and on Sept 10, 2002, when drought extended across 54.63 percent of this area.”

Here’s a drought animation, that gives you a sense of the spread of drought conditions over the past 6 weeks.

Time to panic? The Yes and No arguments

So, should we be hugely worried that – for example, the corn harvest will be massively affected, prices will skyrocket, and food vs fuel concerns will breakout even as US ethanol distilleries, facing escalating feedstock prices and static fuel prices, cuts back on production? Is a disaster in the making?

The Yes argument. In New York, a Reuters report, based on the latest ethanol production numbers, advises that it is so. “The ethanol industry is bracing for its worst spell since the bankruptcy-ridden days of 2007 and 2008,” the news service opined, after US ethanol production dropped to its lowest levels in 10 months. US blend wall issues, corn prices, and falling corn stocks in the face of a persistent hot, dry spell in the US Midwest are among the causes of concern. US ethanol production fell to 857,000 barrels per day as three ethanol plant shutdowns affected production results. Meanwhile, a Linn Group analyst told Reuters that ethanol margins are 20 cents below the minimum viability point. More on that story.

The No argument. So far, the drought is highly regionalized, especially with respect to corn. For example, in terms of corn condition, 50 percent of Indiana corn is rated very poor or poor, while only 10 percent is rated thus in Iowa and 4 percent in Minnesota. The average is 9 percent. This according to the latest weekly publication from USDA, here.

And again, let’s look at last year’s report from NDMC on conditions, just to calibrate that data against a not-so-bad year. How much worse is this year? Well, so far, its better.

“Nearly 12 percent of the contiguous United States fell into the “exceptional” classification during the month, peaking at 11.96 percent on July 12. That level of exceptional drought had never before been seen in the monitor’s 12-year history, ” said Brian Fuchs, UNL assistant geoscientist and climatologist at the NDMC, in assessing July 2011 conditions.

And, last year, the US Drought Monitor warned that “The percent of contiguous U.S. land area experiencing exceptional drought in July reached the highest levels in the history of the U.S. Drought Monitor.”  More on that story.

Stay tuned

“The recent heat and dryness is catching up with us on a national scale,” said Michael J. Hayes, director of the National Drought Mitigation Center. “Now, we have a larger section of the country in these lesser categories of drought than we’ve previously experienced in the history of the Drought Monitor. So far, just 8.64 percent of the country is in either extreme or exceptional drought. During 2002 and 2003, there were several very significant droughts taking place that had a much greater areal coverage of the more severe and extreme drought categories,” Hayes said. “Right now we are seeing pockets of more severe drought, but it is spread out over different parts of the country. It’s early in the season, though. The potential development is something we will be watching.” More on the story.

The corn and soy impact

Overall, the corn crop projection is a mixed bag, with high acreage offset by poor crop condition.

2012 Corn planted is 96.4 million acres, up 5 percent from 201, with projected harvest at 88.9 million acres, up 6 percent. Soybeans planted are at 76.1 million acres,  up 1 percent, while harvest is projected at 75.3 million acres, up 2 percent. Wheat planting is at 56 million acres, up 3 percent. 48 percent of the US corn crop is rated in “good to excellent” condition,  down 8 points from last week and 21 below 2011, in what is the lowest rating since 1988.

Useful links to keep an eye out for

Drought Monitor.
The USDA’s WASDE report is due out July 11.  That will address the impact of conditions on yields.

What’s being done in crop R&D about drought-tolerance

Nature reports new drought tolerant maize strains released by Pioneer. “Last week, DuPont subsidiary Pioneer Hi-Bred International, headquartered in Johnston, Iowa, announced plans to release a series of hybrid maize (corn) strains that can flourish with less water…Pioneer says that field studies show its new hybrids will increase maize yields by 5% in water-limited environments.” More on the story.

Improvements in plant stress response. “When a plant encounters drought, it does its best to cope with this stress by activating a set of protein molecules called receptors. A team of plant cell biologists — led by Sean Cutler, an associate professor of plant cell biology at the University of California, Riverside — has discovered how to rewire this cellular machinery to heighten the plants’ stress response. It’s a finding that brings drought-tolerant crops a step closer to becoming a reality.” More on the story.

Plants subjected to a previous period of drought learn to deal with the stress thanks to their memories of the experience, new research has found. “This phenomenon of drought hardening is in the common literature but not really in the academic literature,” said Michael Fromm, a University of Nebraska-Lincoln plant scientist who was part of the research team. “The mechanisms involved in this process seem to be what we found.” Working with Arabidopsis, researchers found that pre-stressed plants bounced back more quickly the next time they were dehydrated. Specifically, the nontrained plants wilted faster than trained plants and their leaves lost water at a faster rate than trained plants.” More on the story.

Biofuels and energy crop developments in drought tolerance

Super-performing corn hybrid. In February, University of Illinois researchers developed a new maize hybrid that they report will produce as much as 15% to 20% more biomass given the same amount of fertilizer as commercial hybrids.  The hybrid is a mix of both tropical and temperate maize, with increased drought resistance and sugars in the corn stalk, while lowering vulnerabilities to pests and diseases.  The researchers state that the increased stalk sugars will increase ethanol production. More on the story.

Drought-tolerant corn trait. Last December, the U.S. Department of Agriculture deregulated MON 87460, Monsanto’s first-generation drought-tolerant trait for corn.  Drought-tolerant corn is projected to be introduced as part of an overall system that would offer farmers improved genetics, agronomic practices and the drought trait. Monsanto plans to conduct on-farm trials in 2012 to give farmers experience with the product, while generating data to help inform the company’s commercial decisions. The drought-tolerant trait is part of Monsanto’s Yield and Stress collaboration in plant biotechnology with Germany-based BASF. More on the story.

Stress-related hormones enable plant response. In December, researchers at UC Riverside reported a way to heighten a plant’s cellular response to drought.  Plants under drought stress produce abscisic acid, a stress hormone to help the plant survive.  The research, conducted at the laboratory of Associate Professor Sean Cutler, has now succeeded in supercharging the plant’s stress response pathway by modifying the abscisic acid receptors so that they can be turned on at will and stay on.  This could bring drought-tolerant crops a step closer to becoming a reality. More on the story.

Genetic mutation enables drought endurance. Last year, researchers at Purdue University found a genetic mutation that allows a plant to better endure drought without losing biomass. During drought conditions, a plant might close its stomata to conserve water which also reduces the amount of carbon dioxide it can take in, limiting photosynthesis and growth, but the discovery shows plants with a mutant form of the gene GTL1, did not reduce carbon dioxide intake nor lose biomass. It did have a 20 percent reduction in transpiration, however. More on the story.

Who’s working on drought-resistant energy crops?

In specific bioenergy crops, companies such as Ceres (switchgrass, energy cane in the Blade energy crop family) and Mendel Biotechnologies (miscanthus) have been garnering the most attention as they bring new traits forward for the new integrated biorefineries utilizing energy crops. SG Biofuels are also working on traits related to jatropha, which has a history of low-water tolerance.

The bottom line

For now, expect panic – more investors will be reading Reuters and Yahoo than the Digest, and can be expected to freak out. Impacts may include – corn ethanol production shutdowns, rising corn prices, rising RIN prices as obligated ethanol blenders look around for alternatives, or rising ethanol prices as the blenders chase product with price. Corn stocks may fall as hoarding commences and high prices bring out all the sellers.

It’s real, but not yet dire. For now, know that drought is real and widespread, but not as exceptionally severe today, across the US, as even last year’s more limited drought conditions.

It’s regional, so far. The drought has kept away from major ethanol producing states, by and large, like Iowa, South Dakota, Minnesota – but is hitting Illinois and Indiana hard.

July is key. July always is key – it’s just a critical rain and heat month, for crop yields. This year more than ever.

Science is advancing. Keep in mind that crops are more resistant than in the past to environmental stress.

Be vigilant, investor! When panic and worry spreads, and information is scarce, there’s money to be made in the markets, but it requires nerves of steel to keep your cool when everyone around you in losing theirs.