How is U.S. net farm income projected to increase after drought?
Given the widespread drought in the U.S. Midwest, USDA’s late August release of the 2012 Net Farm Income Forecast contained a big surprise. According to the United States Department of Agriculture (USDA), “U.S. net farm income is forecast to exceed $122 billion in 2012 and net cash income is expected to exceed $139 billion, both record nominal values. The expected increase in income reflects large price-led gains in corn and soybean receipts as well as large increases in crop insurance indemnities.
“Extreme hot and dry conditions in the Plains and Corn Belt are drastically cutting projected corn and soybean yields. With corn and soybean supplies for the 2012 marketing year expected to be the lowest in 9 years, prices are increasing dramatically, resulting in higher expected 2012 calendar-year receipts for many crops."
If that income were spread evenly over all farming operations, one could sit back and heave a sigh of relief, after two months of worrying about the impact of the drought on farmers. But as a look at the numbers show, the income is not evenly spread across all farms.
As a sector, the value of livestock production decreased $0.2 billion from a year earlier. The big loss in value of production came in the dairy sector, which is forecast to see a decline of $4.3 billion (10.9 percent) while both meat and eggs are slated to see increases. Over and above changes in the value of production in the livestock sector, the USDA forecasts that the price of feed will increase by $7.2 billion (13.2 percent). That means that after taking feed costs into account, the livestock sector is forecast to see numbers that will be well below last year.
And those numbers are for the sector as a whole. The experience of individual livestock producers is likely to vary widely. For dairy farmers in drought areas who depend upon on-farm feed production, the picture is likely to look a lot worse with income on their farm heading toward deep red. Farmers who have both crop and livestock income may see a wash. Even cow-calf operators in areas with adequate pasture are likely to see some loss in income as the market for their calves takes a downturn due to lower profit expectations by feedlot operators.
The surprise is that the crop sector is projected to “weather” the drought much better than one would naturally expect. Corn yields and production are arguably hit the hardest by the drought so let’s focus on corn.
Since corn planting this spring, the USDA has dropped its corn production projection from 14.8 billion bushels to 10.8 billion bushels, a decline of 27 percent. During this same time, the price of corn has increased by about a 40 percent.