Drought and the impact on feed prices may be on the verge of creating a financial disaster for the pork industry and other livestock species.

The crop stress which began in Indiana and Illinois is now spreading further to the west. Most of the media attention has been focused on crop producers who face large yield losses. However, the animal industries may ultimately fare even worse.

Crop producers have the potential for two compensating income streams when yields are low. The first is what is called the "natural hedge." When yields are low across a broad geographic area, then prices generally rise.

This is especially true when stocks-to-use ratios are tight as they are now. Under these conditions a 10 percent reduction in national yield is offset by a rise in prices that is substantially more than 10 percent. This means that revenues tend to be less negatively affected by yield losses.

Secondly, many crop acres have some type of crop insurance that can help cushion the financial blow of low yields. While these conditions hold on average, there will be considerable ranges in how individual farm families are impacted.

Pork and animal producers tend not to have any form of income protection against higher feed prices in the short-run.

The weather market is just three weeks old at this writing. December 2012 corn futures have risen by $2.25 per bushel and December meal futures are up $100 per ton. These represent a 45 percent increase for corn and 28 percent increase for soybean meal.

These higher feed prices have to be absorbed by the animal industry, causing a collapse in financial margins. This is because higher feed costs cannot be passed on to the consumer — there is no natural hedge for the animal industries in the short-run.

The collapse of margins results in financial losses which cause discouragement among animal producers. This will result in selling at lighter weights and the beginning of liquidation of some of the breeding herds and flocks immediately, but especially this fall.