November 17, 2012 / 12:05 AM / 7 years ago

Despite severe drought, farm income may hit record high

WASHINGTON (Reuters) - Farm and ranch income shriveled this summer during the worst drought in half a century, according to three Federal Reserve regional banks that oversee Farm Belt lending, with livestock producers hardest hit as pastures withered and feed prices soared.

Even so, agricultural economists from the Fed banks say the farm sector could post record high income this year. High market prices and insurance indemnities will help compensate grain producers for drought-shortened crops, a buffer that livestock producers lack, they said on Friday.

The Federal Reserve’s regional banks in Kansas City, Chicago and St. Louis said red-hot land prices climbed further despite the drought. In Nebraska, non-irrigated farm land values soared by 30 percent from a year earlier. Iowa’s values were up 18 percent and Illinois’ up 15 percent.

“A lot of (farmers) think the future of agriculture is promising and want to expand,” said David Oppedahl, agricultural economist at the Chicago Federal Reserve Bank, who said crop farmers are flush with cash and, with interest rates low, see few alternatives to land for investment.

The farm sector has enjoyed boom times since 2006, when the world entered an era of tight supplies and high but volatile commodity prices.


In quarterly newsletters, the regional banks described the financial impact of drought on farmers.

The Kansas City Fed cited a sharp decline in third-quarter farm incomes “as escalating feed and fuel prices pushed production costs higher,” while the St Louis Fed said “farm income and capital spending were down significantly in the third quarter.”

The Chicago Fed forecast higher feed costs will drive down cash earnings this fall and winter for dairy, cattle and hog producers from a year ago. Crop farmers, in contrast, may actually make more money, it said.

In August, the Agriculture Department forecast record farm-sector income this year, up 3 percent from 2011.

High market prices and crop insurance would offset the losses from “extreme heat and dryness in the Plains and Corn Belt,” it said, even as livestock costs climb. USDA is scheduled to update its forecast on November 27.

Record farm income is within reach although the U.S. corn crop is the smallest since 2006 and soybeans the smallest in four years, said Pat Westhoff of the Food and Agricultural Policy Research Institute.

Market prices are so high that revenue to growers could exceed 2011 despite smaller harvests, said Westhoff.

Corn and soybeans are the two most widely grown U.S. crops. Futures prices for corn are up about 21 percent from a year ago and soybean prices are up about 18 percent.

Feed prices are down somewhat from late-summer peaks, so the stress on livestock producers is slightly less. Still, many hog and dairy farmers face money-losing years.


“Farm income (nationwide) still is expected to be strong,” said Jason Henderson, head of the Omaha branch of the Kansas City Fed. But it may be lower than 2011 in the six-state Kansas City district, centered on the livestock and wheat-growing central U.S. Plains.

“We have two tales of agriculture,” said Henderson.

Record-high commodity prices give grain farmers the cash to continue a land-buying spree that raised fears a year ago of an unsustainable price bubble. At the same time, livestock producers have to pay daunting prices for feed.

The St. Louis Fed said an Arkansas banker who took part in its survey of agricultural conditions said farmers were culling herds because of the drought and having to pay sky-high prices for hay. An Illinois banker said livestock farmers who buy feed rather than grow it themselves “will be hurt the most by this year’s drought.”

Although irrigation would assure a harvest despite drought, profits will be lower because of the cost of fuel to pump water, said another Arkansas banker.

Oppedahl of the Chicago Fed said loan demand was up in Wisconsin, the No 2 dairy state, where the flip side of high crop prices was high feed prices and some farmers have had to take out loans to stay afloat.

“You end up there with higher loan demand,” he said. Land prices in Wisconsin fell by 2 percent from July-September, according to the regional bank’s survey of lenders.

Reporting By Charles Abbott; editing by Ros Krasny and Leslie Adler

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