The 2012 drought across the U.S. rivals those that caused the dust bowl conditions of the 1930s. That comparison frightens farmers and anyone concerned with food supplies. Fortunately, we don’t have to worry about how a repeat of the dust bowl might damage the nation’s economy, because many things have changed since the 1930s.
Here’s what we fear most when we compare today’s drought to the dust bowl days — and why the situation in our Midwestern breadbasket where a huge portion of the world’s corn and soybeans are grown isn’t as grim as you might imagine.
Fear No. 1: Farmers will suffer financial ruin because of the drought.
Reality: In the 1930s, crop insurance didn’t exist and there were no federal programs to assist farmers. Today 93 percent of row-crop farmers have crop insurance. Policies and coverage amounts differ, but most farmers will not suffer a devastating financial loss this year. Make no mistake, farmers don’t like to see their crops fail. It’s a matter of pride to produce robust and bountiful crops. But as I travel the Midwest, I don’t hear farm producers as downtrodden or devastated as they might have been in the 1930s. They will tell you, “These conditions are bad, but it’s nothing I can control, nothing I did wrong, and no bad decision I made.” Farm incomes will suffer, and many farmers will not earn as much as they did in 2011, but 2012 will not be an income disaster.
Fear No. 2: Crops will be devastated.
Reality: Some projections show national corn and soybean crop yields down 15 to 20 percent, or more, for 2012, but the decrease may not be what it would have been in the 1930s. Back then, crops subjected to heat and drought quickly fell prey to disease and insects. Today’s hybrid and genetically modified seeds are more resistant to disease and insects. We’ve experienced three- to four-week dry spells in the last few years, yet we’ve seen surprisingly good crop yields at harvest.
Farmers now have access to a new generation of drought-resistant seeds. Introduced last year, drought-resistant crops represent a small percentage of the market, but new generations of these products will be in wider use over the next few years.
Fear No. 3: Food will be scarce in dust bowl conditions.
Reality: This is a time to appreciate our global economy. In the 1930s, people ate foods raised within a few hundred miles of where they lived. Today, no matter where we live, we routinely consume produce from Florida, Texas, California and South America. Midwest farmers send corn and soybeans around the world, but huge farms in Argentina and Brazil now grow and export corn and soybeans, too. Yes, the weather is unusually hot and dry in most of the U.S., but we can balance food supply and demand globally in a way that wasn’t possible in the 1930s.
Fear No. 4: Food will increase in price.
Reality: Maybe, but not as much as you might fear. For example, the corn in your cereal box accounts for less than 10 percent of the price. When corn prices increase due to low crop yield, it affects just the grain’s small portion of the product cost. What has a far greater impact on the cost of your morning cereal is the price of oil, because it takes fuel to harvest crops, process foods and deliver them to the marketplace.
Where we may see a long-lasting effect of price increases is in meat. When the cost of corn and soybeans used as animal feed gets high, farmers begin to liquidate their cow, poultry and pig herds. As the herds get smaller, there’s less meat on the market, raising consumer prices over a longer period of time. Smaller herds eventually reduce demand for feed grains, which then brings corn and soybeans prices back down. It’s a natural supply-and-demand cycle, but it’s not good for farmers or consumers.
Good news outweighs bad
Though drought headlines dominate the news, there is much good news in the agriculture economy. In fact, there has probably not been a better time for agriculture than the past five years.
Drought pricing: There is one good side to the drought. It’s had an unexpected favorable impact on 2013 pricing for grains. Right now we’re seeing 2013 corn selling for around $6 a bushel on the Chicago Board of Trade. If 2012 was a normal production year and we didn’t have drought conditions, farmers would probably be getting a 2013 price in the $4 range.
Strong demand: Historically, the price of farm products was driven by supply, but in the last five years that has changed and prices are driven by high demand for U.S. agricultural products. Once again, the global economy has benefited the agriculture industry as our products are shipped to the European Union, China, India and other Southeast Asian countries. As personal income rises in China due to their economic boom, diets that formerly consisted mostly of rice now include more protein. It creates a huge market for corn and soybean-based animal feed when an additional billion people add chicken and pork to their daily meals!
Farm land values: Average values for commercial and residential real estate have declined since 2008, making farm land the only real estate sector where prices have increased. Farm land prices in some states increased as much as 20 percent in 2011. While we don’t expect that same rate of increase for 2012, farm land is still an excellent buy. If you’re in the business of leasing farm land, there’s a nearly zero vacancy rate. Since 1992 the cash return on U.S. farm land has averaged more than 12 percent per year – outperforming the inflation rate, gold, T-bills, stocks, bonds and corporate real estate.
Low interest rates: The low interest rates of the last few years have been good for the agricultural economy. The current debt-to-asset ratio in farming is around 15 percent, which is extremely low.
Though this is the worst drought in 50 years, dust bowl conditions are not creating a dust bowl economy.