Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Friday 12/07/12

Droughts No Shock to Farm Income

Using inflation-adjusted dollars, the Great Drought of 2012 shows overall farm incomes are relatively stable, as they were following droughts in the 1970s and 1980s. But that average includes losses in the livestock sector that are masked by record-breaking income for grains producers, USDA says.

Using inflation-adjusted dollars, the Great Drought of 2012 shows overall farm incomes are relatively stable, much as they were following droughts in the 1970s and 1980s. But that average includes losses for livestock feeders which are masked by record-breaking income for grains producers, USDA says.

Modern droughts may wreck havoc on the livestock sector, but they just aren't as financially debilitating to crop producers as they were in the last century. In fact, overall 2012 net farm incomes--including both livestock and crops--will slip only 3.3% from the $114 billion accrued last year, USDA forecast last week. When you examine returns for crop producers alone, farm incomes will top the inflation-adjusted 1974 peak for the second year in a row.

Not only are farm incomes stable, they're remaining at relatively high levels compared to 10-year averages. Unlike the droughts of the last century, USDA holds no mountain of grain reserves that served to keep a lid on prices after short crops. That meant market prices responded to the shortfalls much more aggressively than during the 1988 drought. Spring prices for crop insurance purposes were set at $5.68/bu. for corn and $12.55/bu. for soybeans, but jumped to $7.50 and $15.39 respectively by harvest.

So compared to 1988, anyone who did harvest a crop got a much more valuable take home pay. Most Minnesotans were in that camp this year, and many of them generated 30% to 40% higher revenues than they expected last spring because of cash grain's new market volatility, points out Kansas State University economist Art Barnaby. All that was a benefit of the marketplace.

Another "drought-proofing" factor is that since the mid-1990s, the majority of farmers now elect crop insurance with a harvest-price adjustment. For Iowa farmers with a 50% yield loss, this feature boosted crop insurance payments by over 50%, something they would not have received in the 1980s, Barnaby notes. For example, someone who harvested half a crop on an Actual Production History (APH) of 185 bu. corn, insured at the 80% level, is receiving $271/acre more this year in claims, thanks to the harvest price adjustment. Without it, his overall insurance indemnity would be 65% smaller, Barnaby calculates.

In contrast to higher net incomes in grains and oilseeds, the livestock sector is having a hard time swallowing higher feed costs. Following a $9.2-billion (20%) jump in 2011, feed expenses in 2012 are expected to rise another $9.7 billion (18%)," USDA says. Livestock operators who did not hedge or who watched their pastures dry up may have to make some serious business choices in 2013, farm lenders say.

Crop producers actually fared much better in 2012 than first expected, because of crop insurance and a surprise bump in soybean yields, says Phil Kimmel, senior vice president for credit for Farm Credit Services of Mid-America, a region that serves Indiana, Ohio, Kentucky and Tennessee.

That's an outcome that has many in the farm community counting their blessings.

For USDA's latest income forecasts, go to

http://www.ers.usda.gov/…

Read and comment on all DTN Ag Business Benchmarks on the Minding Ag's Business blog.

Follow Marcia Taylor on Twitter@MarciaZTaylor.

(ES)

Posted at 1:39PM CST 12/07/12 by Marcia Zarley Taylor
Comments (3)
Congress's mindless obsession with targeting the wealthiest farmers with nearly limitless multimillion dollar investment/profit guarantees is one of the most disruptive financial forces to ever hit rural America. Smaller farmers given miniscle government benefits are stamped irrelevant by insane government insurance programs that destroy their ability to compete in any way with the umbrella of overwhelming superior investment/profit guarantees larded on the largest operations and are being rapidly driven from rural America. If smaller farmers are to have any chance of competing in America, government must be stopped from this mindless obsession of awarding the richest with the largest income/investment guaranteeing programs
Posted by Lon Truly at 7:22PM CST 12/07/12
Lon, Why do you single out the food production industry when referencing insurance and programs. Have you looked at FEMA-Banking-Green energy conglomerates, mass transit, airport authority's etc.? One might find all are related in more than one way and dependant on deficit spending. Considering the 3 basics needs for human survival, food and water should be the last on your critical list, not the first.
Posted by Bonnie Dukowitz at 10:30AM CST 12/10/12
Bonnie - Feel free to further expound on the numerous ways the federal government is flushing billions down countless government rat holes. Government insurance policies that drastically reduce the numbers of farmers tend to increase the risks of crops being unplanted and unharvested.
Posted by Lon Truly at 12:28PM CST 12/10/12
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