Graduate Finance

29 August 2012

2012 Drought Economic Impact

The persistent heat and drought seem to be the only topic of discussion lately as the rain starved fields beg for some watery relief. Increasing food prices and fuel costs will soon be joining the ever important conversation as the worst drought in 50 years persists, thus having a very negative impact on the already sluggish economy. In my paper, I will discuss some of the economic impact the drought is having on consumers, farmers and ranchers; also what actions the Obama administration will take in order to ease fears for all those involved.

The drought has hit corn especially hard during the ever important pollination process thus causing the growing cycle to be very much disrupted. However soybeans which mature later in the season should be better off than corn, although prices are expected to increase for both. Futures prices for corn have increased 60 percent, wheat is up to 41percent and soybeans have risen 24 percent (Lempert).Corn is the biggest U.S. crop, valued at $76.5 billion in 2011, followed by soybeans at $35.8 billion, according to the National Agricultural Statistics Service (Lempert).

It is crisis such as this which reminds the consumers how important and fragile American’s farming industry is. In fact about 60 percent of U.S. farmland and more than one half of American counties have been affected by the drought and are currently designated drought disaster areas (Lempert). Programs such as Federal Crop Insurance Program and Emergency Conservation Program will ensure a speedy recovery and stabilize prices. It is important to have a strong farm safety net in order to sustain the success of American agriculture. In fact the USDA has expanded the availability of farm credit, helping struggling farmers refinance loans. Unfortunately, there are a few smaller family run farms that will not qualify for the relief the program offers and have to shut down (Lempert). The real reason is because they are simply too small to qualify for all the loans that might be available to the larger farms. However, there may be assistance through other local programs such as banks extending lines of credit should the situation arise..

Farmers will need to use their crop insurance to offset some of their losses; it is unfortunate that this type of insurance is unavailable to livestock producers. Later in my discussion I will elucidate about some of the available assistance the federal government is offering. Many are forced to thin their herds to raise income and lower costs from high-priced feed (Bjerga). Government-subsidized insurance payments will cover 85 percent of anticipated revenue, helping crop producers through this year.

Crop subsidies may rise 6.3 percent this year to $11.1 billion (Bjerga). Assuming that the benefits will continue beyond Sept. 30 when the current farm bill expires. The Senate and the House Agriculture Committee have approved bills that would eliminate about $5 billion in annual subsidies paid directly to farmers while boosting other support programs by smaller amounts (Bjerga).

This drought is similar to a domino effect because the pattern by which this drought is affecting food prices is consumers will see the price of corn go up, driving up the price of feed, and in turn the price of animals that go to slaughter or animal products. However, on a more longer term down the road into 2013 possibly into 2014, consumers will observe higher corn and soybean prices built into packaged, processed, more shelf stable foods (Staff). Examples would include cereals, bakery products and other foods with grain; will likely see above average inflation. However, one bright spot for consumers is that inflation for fruits and vegetables are expected to stay normal, at 2% to 3%. And, though higher corn and soybean prices may not immediately affect meat and processed foods, effects may be felt well into 2014 (Staff). So the question is how much more will consumers pay on average for food in the coming months and year? According to Michael Feroli, chief economist at J.P. Morgan Bank, food prices will increase an average 4 percent annual rate in the nine months ending June 2013, up from the current 1.5 percent (Chandra). This may result in a decrease in disposable income by 0.3 percent from the fourth quarter of 2012 through the first half of next year and reduce spending by a similar amount, as well (Chandra). Sweltering temperatures along with drought-charred land and soaring feed prices has left little grass to feed the several herds of hungry cattle. With congress on a five-week break without agreeing on aid to help ranchers through one of the worst droughts in the nation's history, this season could prove devastating for the already struggling cattle industry. What this means is it will be September before any ranchers can even hope for disaster aid legislation hopefully that includes cash to buy feed until they would normally send their cattle to feedlots or slaughter in the fall or winter. This situation is a difficult one as several anxious ranchers are out of feed and money, have been selling off animals for months in effort to thin their herds. But ranchers are in a particularly precarious position because most don't have access to federally subsidized insurance programs that cover crops like corn and soybeans (Beck). Recently, the White House announced the federal government will buy up to $170 million worth of pork and other meat for food assistance programs to help drought-stricken farmers. In an effort to bolster prices the Defense Department is encouraging its vendors to speed up meat purchases in an effort to offset an expected overabundance on the market in the next few months (Beck). Because of the excesses hitting the market and grocery stores this fall farmers are expecting to get only a fraction of what their animals are worth. The prices will be dropping briefly and then rising early next year. It is a very unfortunate situation as farmers are expected to sell their animals for the price that is presented to them and their really is no room for negotiation. In spite of the administration offering low-interest emergency loans, opening federal land for grazing and distributing $30 million to get water to livestock; ranchers are still having a very difficult time. The emergency loans are complicated and aren't available to everyone. Although they are grateful for the water, animals need to eat, and hay is in short supply. $383 million in disaster relief was approved by the House in the earlier part of August then Congress went home before the Senate acted on the bill. The Senate had previously passed a disaster aid package as part of a five-year farm bill, but GOP leaders in the House refused to bring that to a vote because many Republicans object to the nearly $80 billion included for the food stamp program (Beck). It is this uncertainty that is leaving livestock producers concerned as what to do for their herds. Some may take the chance and buy expensive feed hoping the federal government will help them pay the bill or perhaps should they sell their cattle at a loss wondering if they had held onto them a bit longer maybe they might have been eligible for aid (Beck)? It is also unclear how much money individual ranchers would receive even if Congress passed the House bill upon members' return. The estimated $383 million disaster relief package would be divvied up among eligible applicants after considering a number of factors. Depending upon where a person stands in this, they may be eligible for tens of thousands of dollars or possibly nothing at all. For some their decision will come too late as many ranchers have made arrangements knowing their losses are in the thousands of dollars already.

Works Cited Beck, Margery A. "Ranchers Lose Hope Drought Aid Will Come in Time." Yahoo! Weather. Yahoo! Weather, 19 Aug. 2012. Web. 29 Aug. 2012. . Bjerga, Alan. "U.S. Farm Income Seen Rising as Drought Spurs Higher Prices." Http://www.businessweek.com. Http://www.businessweek.com, 28 Aug. 2012. Web. 28 Aug. 2012. Chandra, Shobhana, and Sandrine Rastello. "Drought-Driven Food Costs May Damp Consumer Sentiment." Bloomberg Businessweek. Bloomberg Businessweek, 27 Aug. 2012. Web. 28 Aug. 2012. Compiled by Staff. "Retail Food Prices Should Stay Steady in 2012." Http://farmfutures.com/story.aspx/retail-food-prices-should-stay-steady-2012-17-62826. Http://farmfutures.com/story.aspx/retail-food-prices-should-stay-steady-2012-17-62826, 28 Aug. 2012. Web. 29 Aug. 2012. Lempert, Phil. "Historic 2012 Drought - The Food, Nutrition, & Science Newsletter with Phil Lempert! - Providing the Latest Information about Food Nutrition, Science, Technologies, News and Trends." Historic 2012 Drought - The Food, Nutrition, & Science Newsletter with Phil Lempert! - Providing the Latest Information about Food Nutrition, Science, Technologies, News and Trends. Http://www.foodnutritionscience.com/, 27 Aug. 2012. Web. 29 Aug. 2012. .