Drought affecting more than just farmers

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Chris Smith, co-owner of Smith Implements, sits in one of the company’s popular John Deere S680 combines. The drought will likely affect the company’s bottom line this fall. Staff photo by Tom Russo

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August 26, 2012

Drought affecting more than just farmers

Economists predict trickle-down effect with multi-year implications

By ARIKA HERRON (Greenfield) Daily Reporter The News and Tribune Sun Aug 26, 2012, 05:55 PM EDT

GREENFIELD — Chris Smith doesn’t need anyone to tell him that this year’s drought will affect more than just farmers.

The co-owner/manager of Smith Implements has already seen pre-orders on planters take a 20 percent slide this summer, so there is little doubt the company’s business will be down this fall.

It is two months until the deadline to make combine orders for next year’s harvest. Smith knows he’ll probably see fewer orders as the farmers who make up 80 percent of his business await the returns from a drought-stricken harvest that will be disappointing at best, though more likely devastating in many cases.

“We just hope they have insurance,” Smith said from his Greenfield office Monday.

The impact on Smith Implements and other businesses like it is an obvious one — any business tied to the farming community watches the field conditions just as closely as the farmers who work in them.

But tractor suppliers, fertilizer manufacturers and grain elevators are not the only ones who will feel the impact of this summer’s historic drought.

Agricultural economists are now predicting a trickle-down effect that will have multi-year implications on all consumers, the depth of which has been unseen since the Dust Bowl era.

Experts believe this drought will be one of the most expensive natural disasters on record.

Chris Hurt, agricultural economist at Purdue University, said the economic impact of the 2012 drought looks to be on or near the same scale as the drought of 1988, which is estimated to have cost about $77.6 billion.

It was the second worst natural disaster since the National Oceanic and Atmospheric Administration began its database in 1980, and second in terms of cost only to Hurricane Katrina.

“It could be the second- or third-worst economic natural disaster since 1980,” Hurt wrote in an email. “It is a big deal.”

The impact for consumers could be even worse.

Going into the 1988 drought, there was a surplus of corn and soybeans that helped mitigate the effects of the crop loss on livestock producers, the largest consumers of corn and beans grown in the United States, said Corrine Alexander, agricultural economist at Purdue University.

The industry did not have that kind of inventory coming into this year, as a lesser drought in the south last year resulted in a poor growing season. So livestock producers are seeing skyrocketing feed costs, which will translate into higher costs on livestock products — meat, eggs and dairy products — at the grocery store.

“Our number one use for corn and soybeans right now is to feed the livestock sector,” Alexander said. “That’s where we’ll see the biggest impact.”

The pork and beef industries are being hit the hardest, so prices may drop briefly as feed costs force some producers to liquidate part of all of their herds. By 2013, though, Alexander said shoppers could see prices jump as much as 5 percent.

The most recent Consumer Price Index is already showing a response by the poultry industry. Prices for chicken were up 5.5 percent from the same time last year.

Alexander did say, though, that the poor corn crop will have a lesser impact on processed foods like cereal and corn chips.

“The share of the ingredient value of corn in a lot of processed products tends to be a lot smaller than in things like livestock products,” she said.

The length of the drought’s affect on food prices is what will set it apart. Prices will not have a chance to return to normal until a good growing season produces a crop that will stimulate expansion in the livestock industry, and producers are able to raise those animals to market weight. For the chicken industry, it could be several months after next year’s harvest. For pork and beef it will taken even longer — six months to several years. And all of that is dependent on a good harvest next year, Alexander said.

Alexander said the last time we saw food prices at these levels was in 2008, before the global economic slowdown forced down demand, resulting in lower prices. As for how long these prices could last, Alexander said there’s no way to know.

“We just can’t predict it,” she said.

As for the impact on businesses tied to farming, like Smith Implements, Alexander said those are likely to bounce back faster with a solid crop next year.

“It could just be a negative, one-year blip,” she said.

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Drought affecting more than just farmers

Economists predict trickle-down effect with multi-year implications

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