Farm income may rise as drought spurs higher prices

The worst U.S. drought in more than five decades is forecast to raise farm profits to a record $122.2 billion this year as higher prices and insurance payments outweigh crop losses from the dry conditions.

Income will rise 3.7% from a revised $117.9 billion in 2011, the U.S. Department of Agriculture said today (Aug. 28) in a report on its website. The forecast is up from $91.7 billion in February. The value of crops will rise 6.7% to $222.1 billion, an all-time high, while revenue from livestock sales will decrease 0.1% to $165.8 billion, the USDA said. Expenses such as diesel fuel and animal feed will increase 6 percent to $329.1 billion.

Pressured by the prospect of higher prices, corn futures surged 58% since mid-June before today, soybeans were up 31% and wheat 41%. The drought may push food inflation as high as 4% in 2012, the USDA said last week. The department has declared natural disasters in more than 1,800 counties in 35 states, more than half of the country’s total, mostly because of the dry, hot weather.

“Despite the severity of the 2012 drought, shortfalls in marketing-year production do not necessarily have a detrimental impact on sector-wide farm income,” the USDA said in the report. “Shortages raise the prices farmers receive for crops sold in calendar-year 2012, and crop insurance partially offsets the impact of lower yields.”

Farm-related income, which includes government-backed crop insurance, will total $34.5 billion, compared with $26.1 billion last year and $19.9 billion estimated in February, the USDA said.

Government-subsidized insurance payments, which at their highest levels can cover 85% of anticipated revenue, may help crop producers through this year, said Tabitha Craig, who sells coverage for Young Enterprises in New Hartford, Mo. The benefit is unavailable for livestock producers, who are being forced to thin their herds to raise income and lower costs from high-priced feed, Craig said.

If farmers don’t have crop insurance, “it’s going to be a really bad year,” she said in an interview this month. For livestock producers, “if you use any grain or any protein at all, costs will be way, way up there.”

Crop subsidies, not including insurance assistance, may rise 6.3% this year to $11.1 billion, the USDA said. That assumes that the benefits will continue beyond Sept. 30 when the current farm bill expires. Both 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.

Among farmer costs in 2012, feed, the biggest single component of farm spending, is projected to increase 13% to $61.8 billion, the largest increase in any category except labor. Higher corn and hay expenses are forcing some ranchers to sell animals for slaughter sooner than usual, creating a short-term supply glut and a smaller herd in the long term, said Claude Niemeyer, a cattle buyer at Callaway Livestock Center in Kingdom City, Mo., about 100 miles west of St. Louis.

“Everything’s so much higher this year,” Niemeyer said. “Feed costs, the hay, it’s hard to justify” keeping the animals, he said.

The USDA’s estimate for 2011 profit is a 20% upward revision from February. The department changed its numbers after determining that farmers sold more of that year’s crop during the calendar at higher prices than expected while also spending less on fertilizers, fuel and other costs than estimated, said Mitch Morehart, an economist with the agency’s Economic Research Service.

Agriculture Secretary Tom Vilsack said while “strong farm income” will help many farmers and ranchers through the drought, “it is important to remember that thousands of farm families, particularly livestock and dairy producers, continue to struggle.”

Vilsack repeated his call for Congress to pass a new farm bill that will provide “more certainty” for agricultural producers.

Today’s estimates will be revised in November.