Drought brings record income for US farmers

A dry spell in the US may have shriveled crops, but it has brought record-high income because of higher prices paid for crops, drought insurance payouts and rapidly rising farmland values

By Jeff Wilson and Elizabeth  /  Campbell Bloomberg

Sun, Nov 25, 2012 - Page 9

Even after the worst drought in a half-century shriveled crops from Ohio to Nebraska, US farmers are having their most profitable year ever because of record-high prices and insurance claims.

Farmer income will probably jump 6.9 percent to US$144 billion, exceeding the government’s August estimate of US$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 US$28 billion, according to Doane Advisory Services Co, a farm and food-company researcher in Saint 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 416 hectares he farms near Fredericksburg, Iowa.

“It was the difference between making a profit or sustaining a loss,” he added.

Farming accounted for 0.9 percent of the US economy last year, generating 11 percent of total exports and employing 2.635 million workers, Bureau of Economic Analysis data show. Deere & Co, the world’s largest agricultural equipment maker, on Thursday boosted its forecast of US farm cash receipts for this year to US$388.2 billion and predicted a 3.7 percent gain next year to US$402.5 billion.

Midwest farmland values rose by 13 percent to a record in the third quarter and spurred sales of Monsanto Co seeds, Deere tractors and CF Industries Holdings Inc fertilizer. Costlier grain eroded profit for pork producer Smithfield Foods Inc and restaurant owners, including Texas Roadhouse Inc. The government is predicting food inflation will accelerate next year, led by meat, dairy and baked goods.

The Standard & Poor’s GSCI Agriculture Index of eight farm products gained 9.3 percent this year. Wheat soared 32 percent to US$8.5975 a bushel on the Chicago Board of Trade, corn advanced 15 percent to US$7.4525 and soybeans added 17 percent to US$14.0825. That contrasts with an 8.4 percent gain in the MSCI All-Country World Index of equities and a 2.4 percent return on US Treasuries, a Bank of America Corp index shows.

While smaller harvests are reducing supplies from the US, the biggest agricultural exporter, slowing demand growth and more production in other nations are easing the impact. The UN says the global cost of food imports will drop 10 percent to US$1.136 trillion this year and its gauge of world food prices is 10 percent below the record set in February last year.

Production of corn, the biggest US crop, fell 13 percent to 272.4 million tonnes, the lowest since 2006, the US Department of Agriculture (USDA) estimates. In the two months from mid-June, prices surged as much as 68 percent on the Chicago Board of Trade to a record US$8.49. Crops withered in the US as Midwest states went without rain for most of July and August, and temperatures set heat records going back more than a century.

Soybean output fell 4 percent to 80.86 million tonnes, driving futures to an all-time high of US$17.89 on Sept. 4. Wheat prices reached a four-year high of US$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 in June.

The boom may not last. While the US trade surplus in agriculture rose tenfold since 2005, the government predicts an 8.6 percent drop in the country’s combined wheat, soy and corn exports next year. Surging prices will encourage farmers to plant more for next year’s harvest and Memphis, Tennessee-based Informa Economics Inc forecast on Nov. 2 that global corn production may jump 14 percent next year as wheat output gains 7.5 percent.

Hedge funds and other large speculators are getting less bullish on agriculture. A measure of their bets on higher prices across 11 US farm goods declined in nine of the past 10 weeks, Commodity Futures Trading Commission data show.

Higher prices are curbing demand, including from ethanol refiners, who use more US corn than anyone else. Output of the biofuel has fallen 14 percent this year as distillers idled plants, Energy Department data show.

Livestock producers are also paying higher feed costs. Hog farmers that did not hedge lost about US$54 on each animal sold for slaughter in September, from a year-earlier loss of US$2.65, according to data from Iowa State.

Smithfield Foods, the largest US pork producer, said on Sept. 4 that net income fell 25 percent in the quarter ended July 29.

Mark Legan, 52, who sells 20,000 hogs to slaughterhouses and 60,000 weaned pigs to other producers annually from his farm in Coatesville, Indiana, said feed costs this year are the highest since he started in 1989.

The outlook is better for agricultural suppliers. Saint Louis-based Monsanto, the world’s largest seed company, expects earnings to be as much as 17 percent higher in its fiscal year ending on Aug. 31.

The company said in June it would benefit from the drought because competitors face seed shortages.

North American sales of high-horsepower tractors rose 33 percent last month from a year earlier, according to Karen Ubelhart, an analyst for Bloomberg Industries in New York.

Agco Corp expects “historic high levels” of demand for high-horsepower products for the rest of the year, its chief financial officer Andrew Beck told a conference in Boston on Nov. 14.

More than 1.16 million crop-insurance policies were written to cover 281.2 million acres this year, 6.1 percent more than last year, when damage claims reached a record US$10.79 billion, USDA data show. Payouts would surge because most policies were linked to prices at the harvest, said Richard Pottorff, the chief economist for Doane Advisory Services in Saint Louis.

Government-backed insurance policies offered through units of companies such as ACE Ltd, Wells Fargo & Co, Great America Insurance Co and Deere have already paid US$5.74 billion in claims on liabilities of US$116.3 billion, according to USDA.

Farm income has more than doubled since 2006 and three consecutive years of record profit left US farmers with a debt-to-assets ratio of 10.2 percent — the lowest since the government began tracking the data in 1960. The gauge of net-cash income for farmers subtracts costs including seed, fertilizer, labor and interest on debt from gross cash income. The US Department of Agriculture updates its farm income forecast on Tuesday and farm-trade estimates on Thursday.

Rising profit helped spur a land rush. The Federal Reserve Bank of Chicago said on Nov. 15 that farmland in Iowa, the largest US corn and soybean grower, rose 18 percent in the year that ended on Oct. 1. A farm in Iowa’s prime northwest growing region sold several weeks ago for a record US$21,900 an acre, topping the previous high last year of US$20,000.

The surge in US farmland prices signals the market may be in a bubble, Alex Pollock, a former chief executive officer of the Federal Home Loan Bank of Chicago, said in a Nov. 16 Heritage Foundation report. The gains would be threatened by higher interest rates and lower crop prices, he said. The Federal Reserve has pledged to keep rates at a record low until at least mid-2015.

Farmers National Co, the largest US farm manager, sold a record 850 properties at a combined value of US$640 million in its most recent fiscal year. Transactions rose 20 percent and prices as much as 15 percent.

“Insurance payments will keep most farmers whole and profitable this year, so the drought affect was minimized,” its CEO Jim Farrell said. “We are coming off of back-to-back record income years on the farm, so they were better able to withstand a poor crop.”

While corn futures fell 12 percent since reaching a record in August, the USDA is still forecasting a record annual average for prices paid to farmers. It also expects the highest averages ever for soybeans and wheat.

That will help spur gains in domestic food prices of as much as 3.5 percent this year and 4 percent next year, above the average of 3 percent since 2004, according to the USDA. Food costs, including beef, may rise 5 percent to 8 percent next year for the Louisville, Kentucky-based steakhouse chain Texas Roadhouse, its CEO Wayne Kent Taylor said on a conference call with analysts on Nov. 1.

The US dry spell is expected to persist at least through February in most areas and spread across Texas, the US Climate Prediction Center said in a three-month outlook on Nov. 15. The lack of water is threatening the winter-wheat crop.

“We remain in the middle of a weather market,” said Jason Henderson, an agricultural economist at the Federal Reserve Bank of Kansas City. “If drought conditions abate, we will have a strong rebound in production. If the drought lingers, that will challenge the ability to raise bumper crops.”