Chicago Fed Economist on The Impact of The 2012 Drought

Oppedahl

 

Incredibly, variability in crop quality will stand out as one of the hallmarks of a drought-hit 2012 growing season that will reverberate across the sector.

That variability makes it difficult for farmers to review what worked and what didn’t in a season that saw the U.S. experience its worst drought in 25 years, says David Oppedahl, Chicago Federal Reserve agricultural economist.

As devastating as the 2012 drought was, it seems that crop losses in the U.S. overall were lower than what was expected given the severity of the weather. Losses weren’t as bad as 1988, the last time the U.S. suffered widespread drought, “but last year was certainty bad enough,” Oppedahl says.

Two differences between 1988 and 2012 helped mitigate some of the drought damage, he says: better seed technology and an increase in use of low-till techniques which helped soils retain more moisture.

Some farmers received rains at key times which also limited losses. “There was a lot of variability in the region, even in some fields which can make it hard to figure out for certain (what helped) … but certain farming practices helped,” he says.

In the January U.S. Department of Agriculture crop production and supply and demand reports, the government estimated this year’s corn production at 10.7 billion bushels, down nearly 2 billion bushels from the past two seasons. USDA forecast national yield at 123 bushels per acre, down sharply from the finalized 2010-11 yield of 152.8 bushels.

Soybean production was forecast at 3 billion bushels, with a yield of 39.6 bushels per acre. In 2010-11, soybean output was 3.3 billion, with a yield of 43.5 bushels per acre.

Drought sped harvesting for farmers. The 2012 harvest was the fastest farmers gathered the corn crop and the fifth-fastest harvest in 30 years for soybeans.  It’s still too early to tell what the exact financial impact of the drought will be, but its effects will reverberate in many sectors for months to come, Oppedahl says.  He adds that corn and soybean producers who had crop insurance should be able to bounce back as insurance payments should cover most of their lost production.

About 282 million acres, or more than 80 percent of the acres of major field crops planted in the U.S., are covered by federal crop insurance, according to the USDA. In January, the Risk Management Agency at the USDA estimated that farmers received record insurance payouts last year of more than $11.5 billion.

While grain producers have some income cushion if they had insurance, livestock producers are in a tougher spot. “Livestock producers are going to be stretched,” according to Oppedahl.

Crop quality issues mean suitable livestock feed supply will be tighter as corn with high levels of diseases like aflatoxin must be blended to prevent animal illness. Also, without a new farm bill, some programs that might have helped livestock producers have lapsed, he said.

The Chicago Federal Reserve is the seventh Federal Reserve district and covers Illinois, Indiana, Iowa, Michigan and Wisconsin. In those states, hog and dairy producers make up the bulk of the livestock herds. Hog production might slow down, but dairy farmers are likely to reel harder from the effects of the drought. The dairy industry was already suffering from low milk prices and the ramifications of high grain prices are going to be felt more acutely there, Oppedahl says.

Ethanol producers are also being hit by the high grain prices and tight supply. Biofuel producers have the added burden of competing with other fuels, the global energy market and policies from the Environmental Protection Agency regarding the Renewable Fuels Standard.

Part of how fast ethanol and livestock producers can rebound will depend on how they can adjust to the new cost structure, he says.

Overall, the 2012 drought hammered home the need for solid risk management plans, according to Oppedahl.

“A good, sound, well thought out risk management plan is essential in a year of plenty or a year of drought. It’s not just how you utilize your financial assets, but the way you buy and sell and use your marketing tools. The better you plan ahead decreases the chances you have knee-jerk reactions to the market.”

 

Read More on the 2012 Drought:

The Lingering Impact on Livestock

Why The Midwest Matters

Gauging The Effects of the Drought

About the Author

Debbie Carlson has focused on commodities for much of her writing career. She spent more than a decade at Dow Jones covering the Chicago-based futures exchanges. As a Dow Jones editor, she worked closely with The Wall Street Journal and Barron's in planning commodities coverage.

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