Minding Ag's Business

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.

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