Drought dims farm economy - Charlotte Observer

WASHINGTON Cloudless skies have seldom looked so ominous.

A worst-in-a-generation drought from Indiana to Arkansas to California is damaging crops and rural economies and threatening to drive food prices to record levels. Agriculture, though a small part of the $15.5 trillion U.S. economy, had been one of the most resilient industries in the past three years as the country struggled to recover from the recession.

?It might be a $50 billion event for the economy as it blends into everything over the next four quarters,? said Michael Swanson, agricultural economist at Wells Fargo in Minneapolis, the largest commercial agriculture lender. ?Instead of retreating from record highs, food prices will advance.?

The U.S. Department of Agriculture declared Wednesday that more than 1,000 counties in 26 states are natural-disaster areas, the biggest such declaration ever. The designation makes farmers and ranchers in affected counties ? about a third of those in the entire country ? eligible for low-interest loans to help manage the drought, wildfires or other disasters.

Corn rose Monday to the highest price in 10 months while soybeans increased to the costliest since 2008.

?The drought will have regional, national and even international impacts,? Ernie Goss, a professor of economics at Creighton University in Omaha, Neb., said in an email. Farm income, which has underpinned the growth of many rural states, will be under ?significant downward pressure,? Goss said.

The USDA has said the drought is the worst since 1988 and cut its forecast for the corn harvest for the year by 12 percent. Those estimates could worsen if rain does not come, said Brandon Kliethermes, a senior economist with IHS Global Insight?s agriculture group in Columbia, Mo.

?We?re not to that point yet but we?re trending that way,? he said.

The acreage affected by drought has expanded rapidly, according to the government-funded U.S. Drought Monitor in Lincoln, Neb. In the high-plains states of North Dakota, South Dakota, Wyoming, Nebraska, Colorado, and Kansas, the areas designated as being in moderate to exceptional drought rose to 84 percent as of July 10 from 74 percent a week earlier.

In the Midwest, 63 percent of the region was in drought as of July 10, up from 53 percent on July 3. Key corn-growing states, including Indiana, Illinois, Iowa and Missouri, are listed as abnormally dry or worse. Yet within those regions, some states have fared better, such as Minnesota and North Dakota, where about 25 percent of each state is experiencing drought.

The biggest U.S. crop, worth $76.5 billion last year, corn is the main ingredient in the feed of chicken, cattle and hogs. Meat, poultry and fish prices surged 7.4 percent last year and are expected to gain as much as 4.5 percent this year as rising prices make animal feed more expensive. Soybeans have risen 21 percent since mid-June and wheat has climbed 40 percent.

?Commodity prices play their way through to food,? said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, in response to a question after a speech Friday. ?So my immediate concern is that would put upward pressure on food prices and could contribute to unwanted inflation in that subset of the broader inflation numbers.?

Ripple effect

The resulting prices could have an effect on food retailers such as McDonald?s, which faces higher meat costs. Cereal and beverage makers such as General Mills and Coca-Cola face elevated corn and sweetener prices.

The drought is eroding the profit outlook for Archer Daniels Midland by boosting costs for the world?s largest corn processor, according to Topeka Capital Markets Inc., a broker-dealer with offices in Chicago and New York. The outlook for ADM?s adjusted earnings, based on the average of 13 analysts? estimates compiled by Bloomberg, fell to $3.03 a share for the 12 months through June 2013, down 3.8 cents in the past four weeks, data compiled by Bloomberg show.

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Rising prices can benefit farmers who have successful harvests or took out sufficient insurance on their fields. Farm cash receipts are now expected to be a record $140.5 billion for the crop year of 2012-13, up 4 percent from 2011-2012, according to a report from JPMorgan Chase Wednesday.

Still, with such a wide swath of farmland facing damage, that may not matter much.

?Farmers have always said to me $7 corn is no good if I have no corn,? said Ann Duignan, the JPMorgan analyst who wrote that report, in a July 10 interview.

Source: http://www.charlotteobserver.com/2012/07/17/3386331/drought-dims-farm-economy.html

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