Farmers Weather 2012 Drought Better Than in 1988

U.S. crops are taking a beating in the worst drought since 1988 but most farmers are not sweating like they did 24 years ago when a drought hit as they were just starting to recover from a farm depression that brought down a big slice of the Midwestern economy.

While financial losses from the 2012 drought in the world’s largest food exporting nation will no doubt top the $40 billion of losses in 1988 — an inflation-adjusted $78 billion today — U.S. farmers face this drought in their strongest financial position in history, buoyed by less debt, record-high grain and land prices, plus greater production and exports, according to agriculture bankers, farm managers and economists.

In addition, much stronger crop and livestock insurance programs than in 1988 will make a huge difference – and some lucky farmers, by collecting insurance but selling remaining harvests at record prices, may even come out ahead of last year, economists say.

Hardest hit will be the dairy, beef, hog, poultry and fish farmers squeezed by soaring feed costs. But they too are better insured than 24 years ago.

“The farm economy is much healthier than it was in 1988,” said Dave Miller, director of commodity research for the Iowa Farm Bureau, who worked through the 1980s. “We were coming out of the farm crisis. You had an extended period of low prices for grains, particularly 1985, ’86, ’87. There was severe financial stress in the ag economy and land prices that had plummeted about 60 percent in many of the Midwest areas. It’s much different today.”

Jason Henderson, chief economist at the Kansas City Federal Reserve, agreed.

“On aggregate we are very strong, but there are going to be those pockets. The livestock sector is going to be the most challenged,” he said. “Right now the debt-to-asset ratios are at all-time lows, which means farmers are in one of their healthiest time periods from the crop side.”

In 2011, U.S. farm income totaled $98.1 billion, a record high – even with significant crop and pasture losses from drought in Texas and other states. U.S. farmer assets are estimated at $2.2 trillion for 2012, with a debt-to-asset ratio of 10.3. In 1988, farm assets totaled $655 billion and the debt-to-asset ratio was 16.9.

Phil Burns, chief executive of F&M Bank in West Point, Nebraska, recalled living through the 1988 drought at a time when the farm crisis was just starting to ease up after the Fed Reserve hiked interest rates sharply to halt inflation but caught thousands of overextended farmers with the move.

“We had just come through a devastating economic blow and came up with a short crop,” he said. “The difference now is this crop is coming on the heels of some of the best times agriculture has ever seen.

“In that regard this isn’t adding insult to injury like it did at that time,” said Burns, who lends to corn and soybean farmers and many small feedlots which annually fatten up to 6,000 cattle each.

Jim Farrell, chief executive of Farmers National Company of Omaha, the top farm management company in the United States, was a farm manager in southern Minnesota during the 1988 drought.

“There were still people being foreclosed on and losing land but it wasn’t like 1986; we were starting to recover,” Farrell said of 1988.

Farrell noted that grain farm balance sheets and much better crop insurance will be keys this time around.

“The older farmers should be well capitalized to be able to make it through a stress year like this. Maybe some of the younger producers or more aggressive producers might have some capital problems, where they haven’t carried enough cash to handle their cash-flow needs in light of a small crop,” Farrell said.

Denny Everson, executive vice president of First Dakota National Bank in Yankton, South Dakota, has been making farm loans for 37 years and says 1988 is very different from 2012.

“We were already dealing with bankruptcies and foreclosures beyond belief,” he said, contrasting 1988 with the strong farm finances of 2012. “Having strong working capital going in is going to help us to be ready to fight the storm. It just depends on how long it lasts. That’s the big question mark.”

University of Illinois agricultural economist Gary Schnitkey, who advises farmers on planning for costs and returns, said: “Crop insurance will provide better protection in 2012 than in 1988.”

According to the U.S. Agriculture Department’s Risk Management Agency, in 1988 only 55.8 million acres of corn, soybeans, wheat and other crops were covered by crop insurance. A total of $1.1 billion in indemnities were paid. By contrast, in 2011 a total of 265.4 million acres of U.S. crops were insured with payouts of $10.8 billion.

RMA said total 2012 participation data will not be known until later this year. But farm economists and advisers said they expected that cash-rich farmers insured at least as many grain acres as last year.

Farrell said a key beneficial change in crop insurance has been the shift to price-based payouts on liabilities, instead of just percentage of average production.

“We have a component to determine the fall price for our corn and soybean crops for the insurance, so if the markets continue to go up our coverage goes up with those prices. In 1988 we didn’t have that. The price was fixed and the only thing that varied was how poor your crop was,” Farrell said, contrasting this to the more flexible insurance available in 2012.

“The guaranteed price in the spring for corn was nationally $5.68 and soybeans $12.55. If the fall price is higher, you can take advantage,” Farrell noted.

Crops like fruits and vegetables, which can be supported by irrigation, are expected to see losses mitigated. But farmers who will see the most financial pressure by far are the livestock sector, led by dairy. Corn and soybean meal are two essential animal feeds, and prices for both set record highs on the Chicago Board of Trade last week, with no quick end seen.

“The dairy farm sector has been struggling for the entire year,” said John Wilson, senior vice president at Dairy Farmers of America in Kansas City. “The drought is causing severe chaos in the corn and soybean and meal market. It’s a double whammy. Farmers were already stressed even with $5 corn where we started the year, and milk prices have generally been depressed.”

In 1988 there was no government-backed insurance for livestock and dairy. But for 2012 dairy producers have insured a total of 46 million cwt (hundredweight) of milk production, according to RMA data. Government-backed insurance also is available for sheep, hogs, and feeder cattle, but so far enrollment is limited.

Iowa Farm Bureau’s Miller said the dairy industry has been “under tremendous stress in two of the last three years — 2011 was not a bad year for dairy but it wasn’t an exceptionally good one. 2009, 2010 were devastating.

“The hog industry the last six months has not been too bad. 2009-10 were not good for the industry but it has had a better recovery period than dairy,” he said.

“Beef depends on where you’re at. The drought of 2010 into 2011 was devastating to the southern Plains cow-calf guys. But it was positive to other areas because calf prices were at record levels through this winter,” Miller said.

Experts agreed that the bottom line would be that many producers will cull their herds as soaring feeds costs erase profits and consumers resist even higher meat prices.

“Over the next year we will probably see some liquidation of herds. Eventually the prices livestock farms will receive will increase. But there are lags to that and it’s painful process to get to those higher prices,” Schnitkey said.

Farrell, whose company oversees hundreds of farmland auctions across the country every year, said one thing this year’s drought had not yet dried up was demand for U.S. farm land.

“We haven’t seen any change across the Corn Belt yet because of the drought. Real estate is a long-term purchase. So they are looking at buying a property that may never come up for sale again in their lifetime. If they can swing it they are probably going to try to swing it,” Farrell said.

Prices for crop and range land in the Midwest and High Plains set record highs in the past two quarters — up to $14,000 – $15,000 an acre compared with $8,000 to $10,000 in 2011 — led by farmer buying but also Wall Street investors. Ten years ago similar top-dollar land in the leading corn state of Iowa sold for about $1,900 an acre.

“People aren’t scared of purchasing yet. We haven’t seen that change. Internally, if this drought rolls over in the upper Midwest in 2013, we could likely see some changes in the real estate market. Now it’s too early to tell. People are still digesting what’s going on,” he said.

One stress point to watch will be land renters, rather than owners, economists said.

“Those renting land are at a bigger risk position in a year like 2012 than they were in 1988,” Miller said.

Schnitkey agreed: “Today, operations that are going to face financial difficulties would be those that have high amounts of cash rent, have pre-harvest hedged a lot of their production in the spring when prices weren’t as high as they are today, and who may have limited crop insurance. All three of those could put a person in financial difficulty.”

But overall, market prices along with better insurance will likely sustain core Midwest and Plains farmers in 2012.

“High incomes, record high land values, record net worth and record low amount of debt relative to the value of your assets: those are great times to go into a problem year,” said Chris Hurt, an ag economist at Purdue University in Indiana.

“Overall, the crop sector will come out of this year reasonably well. It will be a setback but we have financial reserves out there,” said Schnitkey, who said farmers will look for a return to more normal weather in 2013. “It will be a blip out there, hopefully.”