NEW HAVEN, Ind. — Drought conditions across much of the country may have some farmers rethinking their future delivery contracts, according to the marketing director with Central States Enterprises.

Some farmers who contracted to sell certain amounts of new-crop corn or soybeans are concerned they may not be able to meet those obligations because of the dry weather, Jon Cavanaugh said.

“We’ve had calls from some farmers who have their new-crop grain sold and they want to know what their options are, if they can cancel the contracts,” he said. “The answer is, yes they can buy it back or cancel, but they have to pay the market difference.”

The situation would be worse, though, if more farmers had opted for future delivery contracts on their 2012 crop this spring, Cavanaugh noted. The number of farmers with such contracts is pretty small this year because many producers didn’t like the prices when it was time to sign the contracts, he explained.

A producer who has 50,000 bushels of corn to sell probably has no more than a third of that in future delivery contracts, he said. “There’s probably no producer who can say he won’t have enough grain to meet his contract, because it’s a very small percentage of the expected production that has been sold,” Cavanaugh explained.

“It’s a problem, and some producers are nervous, but it’s probably not going to be a severe problem.”

New-crop corn and soybeans have been trading at a discount, with new-crop corn trading about $1-$1.25 per bushel under old-crop, he said.

Shawn Hackett, president of Hackett Financial Advisors, Inc., based in Boynton Beach, Fla., believes the number of farmers with future delivery contracts is higher than Cavanaugh’s estimate.

“By now, the typical farmer has at least 50 percent to 75 percent of the crop sold,” he explained. “The corn crop is basically toast, but soybeans could still pull a rabbit out of the hat if it rains. If farmers end up with half a crop or worse, they’re going to have a problem.”

If weather problems persist, Hackett said he expects corn yields to average in the mid-140s range. “Anytime you have a really short crop, you’ve probably sold more than you’re going to get,” he noted. “It’s never fun to have oversold and have to go buy contracts back.”

Some producers who may have enough corn or soybeans to meet their contract obligations may also have a problem meeting delivery deadlines if the crop is behind schedule, he added.

Producers who expect to be unable to meet their contracts may go out and buy grain, but risk paying more for it than they’ll get per bushel under their contracts, Hackett said. They may buy some futures if they think prices will go higher.

Farmers with forward contracts – where producers promise to deliver a certain amount of grain before their crops are harvested – have three options during a short-crop season, according to Chris Hurt, an ag economist with Purdue University.

Producers can buy back some of those bushels, but they should probably expect to pay some difference for the bushels lost, Hurt said late last month. Farmers also may choose to buy futures to offset some of the price impacts or to buy call options, which are contracts that give them the right to buy a fixed number of bushels for a specific price by a specific date, Hurt noted.

“Buying futures still means they would be committed to deliver the cash position, so that doesn’t get them out of the need to physically deliver,” he said. “But it does get them some recovery against even higher losses on their cash-forward contract.”

According to last week’s update from the U.S. Drought Monitor, parts of northeastern and southwestern Indiana, southern Illinois, western Kentucky and northwestern Tennessee are in extreme drought. Every state in this region has significant areas considered at least abnormally dry.

The soybean crop could end up being in better shape than corn, Cavanaugh said. “Beans planted early aren’t looking so bad,” he explained. “But those planted later haven’t had rain and the fields have crusted over. The later beans were planted, the worse they are.”

The history of price increases for really short crops shows they may jump about 50 percent and then level off at a lower number when demand goes down, Cavanaugh noted. “A year ago, corn hit $8 and that destroyed demand, and a lot of that demand never came back,” he said. “The ethanol industry is a new player, but export demand is very soft.”

It’s too early to know where drought-affected prices may end up, Hurt noted.

“We’ve been hearing of producers calling their grain managers and talking with them about the possibilities of dealing with these yield reductions,” he said. “Right now it’s hard to say what will happen, because nobody knows where grain prices are going to go.”