Record-High Farm Income Despite Drought

(News release provided by Jeff Wilson and Elizabeth Campbell) -- Even after the worst drought in a half century shriveled crops from Ohio to Nebraska, U.S. farmers are having their most-profitable year ever because of record- high prices and insurance claims.

Farmer income probably will jump 6.9 percent to $144 billion, exceeding the government’s August estimate of $139.3 billion, said Neil Harl, an economist at Iowa State University. Parched fields that drove corn, soybean and wheat futures as much as 68 percent higher since mid-June mean insurance payouts may more than double to $28 billion, according to Doane Advisory Services Co., a farm and food-company researcher in St. Louis.

“Crop insurance was a savior this year,” said Kyle Wendland, 29, whose corn yields plunged 36 percent and soybean output dropped 11 percent on the 1,030 acres he farms near Fredericksburg, Iowa. “It was the difference between making a profit or sustaining a loss.”

Farming accounted for 0.9 percent of the U.S. economy last year, Bureau of Economic Analysis data show. Midwest farmland values rose by 13 percent to a record in the third quarter, and spurred sales of Monsanto Co. seeds, Deere & Co. (DE) tractors and CF Industries Holdings Inc. fertilizer. Costlier grain eroded profit for pork producer Smithfield Foods Inc. and restaurant owners including Texas Roadhouse Inc. The government is predicting food inflation will accelerate next year, led by meat, dairy and baked goods.

Higher prices are curbing demand, including from ethanol refiners, who use more U.S. corn than anyone else. Output of the biofuel has fallen 14 percent this year as distillers idled plants, Energy Department data show.

Livestock producers are also paying higher feed costs. The outlook is better for agricultural suppliers. St. Louis-based Monsanto, the world’s largest seed company, expects earnings to be as much as 17 percent higher in its fiscal year ending Aug. 31. The company said in June it will benefit from the drought because competitors face seed shortages.

Meanwhile, North American sales of high-horsepower tractors rose 33 percent in October from a year earlier, according to Karen Ubelhart, an analyst for Bloomberg Industries in New York. Agco Corp. expects “historic high levels” of demand for high- horsepower products for the rest of the year, Chief Financial Officer Andrew Beck told a conference in Boston on Nov. 14.

More than 1.16 million crop-insurance policies were written to cover 281.2 million acres this year, 6.1 percent more than in 2011, when damage claims reached a record $10.79 billion, USDA data show. Payouts will surge because most policies were linked to prices at the harvest, said Richard Pottorff, the chief economist for Doane Advisory Services in St. Louis.

Government-backed insurance policies offered through units of companies such as ACE Ltd., Wells Fargo & Co., Great America Insurance Co. and Deere have already paid $5.74 billion in claims on liabilities of $116.3 billion, according to the USDA.

Farm income has more than doubled since 2006, and three consecutive years of record profit left U.S. farmers with a ratio of debt to assets of 10.2 percent, the lowest since the government began tracking the data in 1960. The gauge of net- cash income for farmers subtracts costs including seed, fertilizer, labor and interest on debt from gross cash income. The U.S. Department of Agriculture updates its farm income forecast Nov. 27 and farm-trade estimates on Nov. 29.

Rising profit helped spur a land rush. The Federal Reserve Bank of Chicago said Nov. 15 that farmland in Iowa, the largest U.S. corn and soybean grower, rose 18 percent in the year that ended Oct. 1. A farm in Iowa’s prime northwest growing region sold several weeks ago for a record $21,900 an acre, topping the previous high last year of $20,000.

The surge in U.S. farmland prices signals the market may be in a bubble, Alex J. Pollock, a former chief executive officer of the Federal Home Loan Bank of Chicago, said in a Nov. 16 Heritage Foundation report. The gains would be threatened by higher interest rates and lower crop prices, he said. The Federal Reserve has pledged to keep rates at a record low until at least mid-2015.

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