Midwest drought was brutal, but "crop insurance was a savior."
Steve Niedbalski is seen chopping down his drought and heat stricken corn for feed Wednesday, July 11, 2012 in Nashville, Ill. Farmers in parts of the Midwest, dealing with the worst drought in nearly 25 years, have given up hope for a corn crop and are mowing over their fields and baling the heat withered plants for livestock feed.
Even after the worst drought in a half century shriveled crops from Ohio to Nebraska, U.S. farmers are having their most-profitable year ever because of record-high prices and insurance claims.
Farmer income likely will jump 6.9 percent to $144 billion, exceeding the government's August estimate of $139.3 billion, said Neil Harl, an economist at Iowa State University. Parched fields that drove corn, soybean and wheat futures as much as 68 percent higher since mid-June mean insurance payouts may more than double to $28 billion, according to Doane Advisory Services, a farm and food-company researcher in St. Louis.
"Crop insurance was a savior this year," said Kyle Wendland, 29, whose corn yields plunged 36 percent and soybean output dropped 11 percent on the 1,030 acres he farms near Fredericksburg, Iowa. "It was the difference between making a profit or sustaining a loss."
Farming accounted for 0.9 percent of the U.S. economy last year, generating 11 percent of total exports and employing 2.635 million people.
Midwest farmland values rose by 13 percent to a record in the third quarter, and spurred sales of seeds, tractors and fertilizer. Costlier grain eroded profit for pork producers and restaurant owners. The government is predicting that food inflation will accelerate next year, led by meat, dairy and baked goods.
While smaller harvests are reducing supplies in the United States, which is the biggest agricultural exporter, slowing demand and more production in other nations are easing the impact.
Production of corn, the biggest U.S. crop, fell 13 percent to 272.4 million metric tons, the lowest since 2006, the Department of Agriculture estimates. In the two months from mid-June, prices surged as much as 68 percent on the Chicago Board of Trade to a record $8.49 a bushel. Crops withered as Midwest states went without rain for most of July and August and high temperatures obliterated records dating back more than a century.
Soybean output fell 4 percent to 80.86 million tons, driving futures to an all-time high of $17.89 on Sept. 4. Wheat prices reached a four-year high of $9.4725 on July 23, and the condition of the winter crop on Nov. 18 was the worst since at least 1985, threatening output of grain that will be harvested next June.
The boom may not last. While the U.S. trade surplus in agriculture rose tenfold since 2005, the government predicts an 8.6 percent drop in the country's combined wheat, soybean and corn exports next year. Surging prices will encourage farmers to plant more for the 2013 harvest.
Meanwhile, livestock producers are also paying higher feed costs. Hog farmers that didn't hedge lost about $54 on each animal sold for slaughter in September, from a year-earlier loss of $2.65, according to data from Iowa State. Net income in the quarter ended July 29 fell 25 percent for Smithfield Foods, the largest U.S. pork producer.
Insurance softened the blow
More than 1.16 million crop-insurance policies were written to cover 281.2 million acres this year, 6.1 percent more than in 2011, when damage claims reached a record $10.79 billion, USDA data show. Payouts will surge because most policies were linked to prices at the harvest, said Richard Pottorff, chief economist for Doane Advisory Services in St. Louis.
Government-backed insurance policies already have paid $5.74 billion in claims on liabilities of $116.3 billion, according to the USDA.
Farm income has more than doubled since 2006, and three consecutive years of record profit left U.S. farmers with a ratio of debt to assets of 10.2 percent, the lowest since the government began tracking the data in 1960.
The gauge of net income for farmers subtracts costs including seed, fertilizer, labor and interest on debt from gross cash income. The USDA updates its farm income forecast Nov. 27 and farm-trade estimates on Nov. 29.
Rising profit has helped spur a land rush. The Federal Reserve Bank of Chicago said Nov. 15 that farmland in Iowa, the largest U.S. corn and soybean grower, rose 18 percent in the year that ended Oct. 1. A farm in Iowa's prime northwest growing region sold several weeks ago for a record $21,900 an acre, topping the previous high last year of $20,000.
The surge in U.S. farmland prices signals that the market may be in a bubble, Alex Pollock, a former CEO of the Federal Home Loan Bank of Chicago, said in a recent Heritage Foundation report. The gains would be threatened by higher interest rates and lower crop prices, he said.
However, the Federal Reserve Board has pledged to keep rates at a record low until at least mid-2015.