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Drought no obstacle to record income for U.S. farms

Nov. 21, 2012 - 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, generating 11 percent of total exports and employing 2.635 million, Bureau of Economic Analysis data show. Deere & Co. (DE), the world's largest agricultural equipment maker, today boosted its 2012 forecast of U.S. farm cash receipts to $388.2 billion and predicted a 3.7 percent gain next year to $402.5 billion.

Midwest farmland values rose by 13 percent to a record in the third quarter, and spurred sales of Monsanto Co. seeds, Deere 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.

Food Imports
The Standard & Poor's GSCI Agriculture Index of eight farm products gained 9.3 percent this year. Wheat soared 32 percent to $8.615 a bushel on the Chicago Board of Trade, corn advanced 15 percent to $7.435, and soybeans added 17 percent to $14.0825. That contrasts with an 8.4 percent gain in the MSCI All-Country World Index of equities, and a 2.4 percent return on Treasuries, a Bank of America Corp index shows.

While smaller harvests are reducing supplies from the U.S., the biggest agricultural exporter, slowing demand growth and more production in other nations are easing the impact. The United Nations says the global cost of food imports will drop 10 percent to $1.136 trillion this year, and its gauge of world food prices is 10 percent below the record set in February 2011.

Withering Crops
Production of corn, the biggest U.S. crop, fell 13 percent to 272.4 million metric tons, the lowest since 2006, the U.S. Department of Agriculture estimates. In the two months from mid-June, prices surged as much as 68 percent on the Chicago Board of Trade to a record $8.49. Crops withered in the U.S. as Midwest states went without rain for most of July and August and temperatures set heat records going back more than a century.

Soybean output fell 4 percent to 80.86 million tons, driving futures to an all-time high of $17.89 on Sept. 4. Wheat prices reached a four-year high of $9.4725 on July 23, and the condition of the winter crop on Nov. 18 was the worst since at least 1985, threatening output of grain that will be harvested in June.

The boom may not last. While the U.S. trade surplus in agriculture rose 10-fold since 2005, the government predicts an 8.6 percent drop in the country's combined wheat, soy and corn exports next year. Surging prices will encourage farmers to plant more for the 2013 harvest and Memphis, Tennessee-based Informa Economics Inc. forecast Nov. 2 that global corn production may jump 14 percent next year as wheat output gains 7.5 percent.

Speculator Holdings
Hedge funds and other large speculators are getting less bullish on agriculture. A measure of their bets on higher prices across 11 U.S. farm goods declined in nine of the past 10 weeks, Commodity Futures Trading Commission data show.

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. Hog farmers that didn't hedge lost about $54 on each animal sold for slaughter in September, from a year-earlier loss of $2.65, according to data from Iowa State. Smithfield Foods (SFD), the largest U.S. pork producer, said Sept. 4 that net income fell 25 percent in the quarter ended July 29.

November 21, 2012  By BloombergBusinessweek