KC Federal Reserve Estimates Drought Impacts

KC Federal Reserve Estimates Drought Impacts

The Kansas City Fed plainly addresses many questions floating around about drought's impact on commodities, consumers and infrastructure

Under the thumb of paralyzing drought this season, farmers are experiencing significant market changes that are driving commodity prices up while commodity supplies are expected to tumble.

A recently released report from the Federal Reserve Bank of Kansas City explains the initial impacts that will be absorbed by consumers and producers in 2012. Report authors Jason Henderson, Omaha branch executive, and Nathan Kauffman, economist, explained that many factors have changed the market landscape this summer, including dwindling expectations of what was once rumored to be the most promising harvest in U.S. history.

DROUGHT DAMAGE: The drought hasn't just affected the corn crop this summer--a variety of ag sectors are experiencing market changes that will set the stage for longer-term effects.

"Although crop prices have yet to match the 50-percent price increases in 1988, further reductions in harvest expectations could send crop prices higher," the authors noted. "Surging crop prices could offset yield losses and raise U.S. gross crop revenues above initial 2012 estimates."

The report indicates that higher food prices are expected next year, and consumer spending patterns will likely follow those changes in food price.

Though many factors will contribute to increasing food prices, concern is developing among producers regarding crop insurance's ability to offset revenue losses. The report estimates that some payments could reach more than $300 per acre.

Ranching, dairy and feeding operations will face different challenges. The authors report that 70% of all beef cows are in states that are have pasture conditions rated as poor to very poor. These conditions have impacted hay availability and quality. The report notes that alfalfa prices have risen 15% since May.

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As a trickle-down effect, ranchers are weaning earlier than usual and are pushing more feeder cattle to feedlots. The authors cite data from the Livestock Marketing Information Center which suggests returns on cattle are down $100 per cow since spring.

The increase in feeder cattle is hurting feeding operations, too. Feed costs are rising, and the authors say prices for key feedstuffs have jumped 25% since May.

Yet another victim of the drought is the dairy industry, which is suffering from lower milk production and higher inputs. The report notes that tightening milk supply has driven prices 17% higher since spring, but that growth is not enough to overcome growing feed prices.

Further, hog operations fared better than beef and dairy, with high profit margins in June. But, those are expected to continue below break-even levels moving into fall, as are break-even levels for poultry.

For consumers, overall concerns of inflation, rising food and meat costs and renewable fuel production are dominating mainstream news wires.

The report explains that drought has affected each of these areas, though in different ways. Ethanol plants, for example, are struggling to maintain profitability, and production was down 13% in the first quarter. Renewable energy policy is also questioned, as production mandates require corn be used for fuel production.

Drought has suppressed transport channels, including the Mississippi River, which will likely drive transportation costs up. Demand for meat is also down, hurting packers' bottom lines.

The authors say that while these short-term changes morph into longer-term effects, the drought is one for the history books.

"Although the immediate challenges of the drought are expected to disappear over time with improved weather, there are concerns about whether some producers can endure these short-term losses," the authors write. "Regardless of how the transition from short-term despair to long-term hope proceeds, the drought of 2012 will be forever engraved into the annals of agricultural history."

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