Drought Impacts and the Economy

By Mark Edelman and Barry Flinchbaugh

© Copyright Agri-Pulse Communications, Inc.



ME. Professor, it is amazing that U.S. farmers can be impacted by the worst drought in recent decades and still end up with record farm income for 2012. USDA's Economic Research Service released their 2012 forecast on August 28 and they expect net farm income to be $122.2 billion. That is up 3.7 percent from last year. Net cash income is forecast to be $139.3 billion, up 3.4 percent from 2011. Net value added is expected to increase $5.9 billion in 2012 to $172.6 billion. These forecasts incorporate the market impacts of widespread drought. If these forecasts become reality, they represent all-time record levels for all three farm income indicators.

 BF. Well it goes to show what can happen when production falls but commodity prices double. Since most producers are now participating in private crop insurance programs, USDA includes more crop insurance indemnity payments in net farm income calculations. While some university analysts initially predicted private crop insurance indemnity payments of $30 to $40 billion due to the drought, it is more likely that indemnity payments will be in the $10 to $20 billion range. In addition, much of the government program safety net is still in tact until September 30, which is the end of the 2012 federal fiscal year. Government payments paid to producers are forecasted to total $11.1 billion in 2012, a 6.3 percent increase from $10.4 billion paid out in 2011. Of course there are segments of agriculture that have not faired as well as the grain producers, and that would be those producers with livestock and dairy.

BioDiesel

 ME.  I would add fruits and vegetables and biofuels to the list of segments in agriculture that have not faired well with the impacts of the drought. USDA also released its agricultural export predictions. The revised 2012 forecasted ag trade surplus is $30 billion, meaning agriculture remains one of our nation's most effective trade balancers. Agricultural exports are projected at a record $143.5 billion for fiscal year 2013, according to USDA's quarterly Outlook for U.S. Agricultural Trade. Overall, 4 to 5 percent world trade growth is expected in 2013.  USDA says that higher expected world growth, lower energy prices, and more available credit make the outlook for U.S. agricultural trade promising in 2013.

 BF. Again the wheat, corn and soybean exports values are up due to higher commodity prices and a slight rise in the exchange value of the dollar--not because of expanded volumes of the commodities exported.  Export values for livestock, poultry, and dairy products are forecast slightly lower and offset the small increase beef export values. We are liquidating cattle numbers in 2012 due to the drought.  So to really understand what is going on, you need to look at both the values and volumes being exported and also understand livestock cycles. Times are tough enough that Governors from states with some livestock and poultry interests--Arkansas, Delaware, North Carolina, Maryland, and Texas--felt prompted to request a waiver of the Renewable Fuels Standard (RFS) in mid-August as an attempt to provide some relief.

 ME.  The analysis of the potential RFS waiver has been an interesting case in keeping score. A Purdue study indicates a partial waiver that would reduce ethanol blended from 11.8 bgy to 11.4bgy could reduce corn prices by 47 cents a bushel (or about 5%). A large waiver that reduces ethanol blending from 11.8 bgy to 7.75bgy could reduce corn prices by $1.34 per bushel (about 16%).  An Iowa State CARD study indicates a full waiver would result in a 7.4% reduction in corn prices.  Both studies say that actual impacts depend on a number of things including the price of gasoline.  Blenders would not be expected to reduce ethanol use for blended gasoline as long as ethanol prices are below gasoline, as they are now.  "If reduced use of ethanol is not economical, then a waiver would have no impact," said one study author.

 BF.  Well approving a waiver doesn't produce anymore corn for this year--that has already been determined by the weather and drought.  The only impact a waiver has is to potentially shift the drought consequences from the shiftors to the shiftees.  Ultimately the downstream impacts are likely to be felt in household budgets.

 ME.  So the food versus fuel debate has crept back into public discussion. I am not surprised.  With widespread national media coverage of the drought, urban consumers are also once again goaded into concern about the potential impacts on the price of food, particularly in this slow growth economy. However, USDA's Economic Research Service reports that while consumer food prices for all food increased 0.8 % in 2010 and 3.7% in 2011, they are only expected to increase by 2.5% to 3.5% in 2012 and 3.0% to 4.0 % in 2013, which only is slightly higher by a half a percent. The value of corn in most grocery products makes up just a fraction of their retail price.

 BF.  Yes, the value of the agricultural ingredients in our groceries represents just 14 cents of every retail food dollar. That's why USDA is expecting food prices to increase just 3% this year and 3.5% next year-which is right in the same ballpark with the 10-year annual average of 2.9% food inflation.  But the cost of corn in a pound of meat is a higher percentage, so meat prices are affected more than other food products.

 ME.  In the final analysis, there two impacts on the household budget and food is only one of them. In one recent report, an LSU study concluded gasoline prices are reduced $0.06/gallon for each 1 billion gallons of ethanol added to the gasoline pool. Geoff Cooper, a Renewable Fuels Association economist concluded that when an increase in household gasoline expenses resulting from a waiver are weighed against the reduction in food expenses, a waiver might be expected to reduce the average household annual food expenses by $3-$9, while increasing annual gasoline expenditures by $33-$88 for the average household.

 BF.  If we accept those numbers, the average household would be ahead without an RFS waiver in current economic circumstances. Well the final decision is political and that involves counting votes. Do not expect any action until after the election, especially with Iowa considered a swing state. Politics trumps economics in the silly season and certainly this year with a polarized electorate.

 

*  Edelman is a Professor of Economics at Iowa State University and Flinchbaugh is Professor Emeritus in Agricultural Economics at Kansas State University.


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