Kansas City Fed Explores Initial Impacts of 2012 DroughtFri, 03 Aug 2012 14:11:48 CDT
American farmers are battling one of the worst droughts in U.S. history. In the latest issue of the Main Street Economist, Omaha Branch Executive Jason Henderson and Nathan Kauffman, economist, discuss some of the frequently asked questions surrounding the drought and its initial economic impacts on agricultural producers, agribusinesses and U.S. food prices.
The most extensive drought in half a century has ruined one of the most promising harvests in U.S. history, and U.S. crop prices surged as the prospect of a bumper crop evaporated. With shrinking yields, crop insurance payments will be a vital revenue source for farmers, underpinning gross revenues for many crop producers.
Amid drought-stressed pastures and rising hay costs, ranching operations bear a heavy burden from the drought. In an attempt to limit losses, ranchers weaned calves earlier than usual and increased the placement of feeder cattle into feedlots. Despite lower feeder cattle prices, cattle feedlot enterprises face significant losses from high feed costs.
U.S. dairy operations are also dealing with the devastating effects of the drought. Heat stress has lowered U.S. milk production, and, although smaller supplies have boosted milk prices, feed prices have surged more quickly. Hog and poultry enterprises are also bracing against rising feed costs and falling profits.
Ethanol plants are struggling to remain profitable in the face of higher input costs stemming from the drought. In addition, the impacts of the drought have spread to agribusinesses that specialize in grain handling, food processing and transportation.
Surging crop prices could offset yield losses and raise U.S. gross crop revenues above initial 2012 estimates. Nevertheless, significant losses could emerge for farmers without crop insurance or those with over-hedged positions in derivative markets.
If historical patterns hold, U.S. consumers can expect to pay higher food prices over the next year. Rising food prices could alter consumer spending patterns, especially for poorer U.S. households. Initial price increases of five percent could be expected due to lower crop yields, and meat prices could increase 10 percent next year due to smaller herd sizes.
The complete article is available by clicking here.
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