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Drought may play havoc with supply chain budgets

As widespread drought annihilates crops and sends prices increasingly higher, supply chain managers at healthcare facilities are no doubt eyeing their budgets.

The U.S. Department of Agriculture is calling the country’s drought “the most serious situation we’ve had in probably 25 years,” said Secretary of Agriculture Tom Vilsack during a press briefing on Wednesday.

Seventy-eight percent of the corn crop and 77 percent of the soybean crop are in drought areas, Vilsack said. More than 1,200 counties in more than 25 states have been designated disaster areas.

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The drought has caused a spike in crop prices, particularly for corn and soybeans, with a 38 percent increase for corn since June 1 and a 24 percent increase for soybeans, Vilsack said.

The pricing increases the country is seeing right now, said Mike Zarembski, a senior analyst at OptionsExpress by Charles Schwab, are the result of a miscalculation. Farmers planted near-record acreage in corn and soybeans so everyone was expecting a record yield this year.

“The prices were reflecting ample supplies going in this year so I think a lot of people got caught short, expecting to be able to obtain supplies much cheaper as the harvest went along,” said Zarembski. “Unfortunately, this drought hit starting six weeks, eight weeks ago here in the Midwest and it has completely devastated – especially the corn crop is really going to be hard hit this year.”

Anticipating tighter supplies means “(I)t’s going to be higher prices across the board for really any kind of food stocks that involve the grains or the energies as well,” he said.

But Amanda Hamilton thinks it is worry that’s driving the market right now with no solid reason for it. “We have been watching what’s happening and to be quite honest nothing has happened yet,” said Hamilton, the director of sourcing operations at group purchasing organization, Novation.

“Specifically with corn, I think there’s a rise only because of the fear factor but not because anything substantially happened,” she said. “We have about another 30 days or so. I mean the outlook isn’t good if it doesn’t rain.”

“One of my suppliers told us the other day, ‘Just pray for rain,’” she said. “If rain comes we’ll be sitting in a good spot.”

But given the National Weather Service’s extended outlook of continued drought, Hamilton says it is wise not to panic but to begin thinking about how to manage supply budgets. “It’s hard to tell right now what the percentage of increase is going to be as far as price goes,” she said since what the yield will be is still unknown. “I wouldn’t feel comfortable giving them any kind of firm number, however I will say find room. Find room for next year of comfort to be able to take from other areas to move over to this area.”