How is U.S. net farm income projected to increase after drought?
This is a rough illustration of what economists would expect. Why? Because it is well known that the corn market is price inelastic. (Stay with us here, its easier to see this than you might think.) The -27 and 40 percent numbers are consistent with a demand elasticity of -0.675 or a price flexibility of -1.48. What this means in plain English is that for each one percent drop in output, the price increases by 1.48 percent. So, in this illustration for the 27 percent drop in output, the price increases by -1.48 times -27, or 40 percent.
How this affects individual farmers’ bottom lines, of course, depends on how much yield reduction they experience on their farms. Those farmers whose yields decline by, say, 25 percent or less will see higher revenues than they expected at planting time. Farmers lucky enough to have trend or even higher yields could have their best revenue and net income years ever.
The profit or loss of farmers whose yields drop by more than the percentage decline at national level will depend upon whether or not they bought crop insurance and what options they chose.
At one end of the spectrum, farmers with substantially reduced yields but who purchased a high level of coverage with the harvest-price adjustment could see per acre corn revenue greater than what they expected at planting time (http://www.farmdocdaily.illinois.edu/004602print.html). For those who bought low levels of coverage and did not purchase the harvest-price adjustment, this year could well be a financial disaster.
It would appear that while crop insurance provides a safety net for farmers, the net is somewhat leaky, guaranteeing pure profit for some while leaving others with significant losses.