Cloudless skies seldom look so ominous.
A worst-in-a-generation drought from Indiana to Arkansas to California is damaging crops and rural economies and threatening to drive food prices to record levels. Agriculture, though a small part of the $15.5 trillion U.S. economy, had been one of the most resilient industries in the past three years as the country struggled to recover from the recession.
“It might be a $50 billion event for the economy as it blends into everything over the next four quarters,” said Michael Swanson, agricultural economist at Wells Fargo & Co. (WFC) in Minneapolis, the largest commercial agriculture lender. “Instead of retreating from record highs, food prices will advance.”
The U.S. Department of Agriculture declared July 11 that more than 1,000 counties in 26 states are natural-disaster areas, the biggest such declaration ever. The designation makes farmers and ranchers in affected counties -- about a third of those in the entire country -- eligible for low-interest loans to help manage the drought, wildfires or other disasters.
Corn rose today to the highest in 10 months while soybeans increased to the costliest since 2008.
“The drought will have regional, national and even international impacts,” Ernie Goss, a professor of economics at Creighton University in Omaha, Nebraska, said in an e-mail. Farm income, which has underpinned the growth of many rural states, will be under “significant downward pressure,” Goss said.
The USDA has said the drought is the worst since 1988 and cut its forecast for the corn harvest for the year by 12 percent. Those estimates could worsen if rain does not come, said Brandon Kliethermes, a senior economist with IHS Global Insight’s agriculture group in Columbia, Missouri.
“We’re not to that point yet but we’re trending that way,” he said.
Indiana has asked residents to conserve water and sent notices to its largest users to request specific cuts as it faces “possibly a historic drought,” according to Al Shipe, a National Weather Service hydrologist in Indianapolis.
The drought is already crimping business for Randy Allen, the store manager at Wright Implement in Crawfordsville, Indiana, who has been selling farm equipment for 22 years and is already seeing farmers pull back.
“Usually at this time we’re selling planters and tillage and we’re not selling near what we have in the past because people are waiting to see how bad this drought is,” said Allen.
“I had a call from one of my farmers who usually buys a combine every three to four years,” said Allen. “If he doesn’t get rain he’ll probably bypass it.”
The acreage affected by drought has expanded rapidly, according to the government-funded U.S. Drought Monitor in Lincoln, Nebraska. In the high-plains states of North Dakota, South Dakota, Wyoming, Nebraska, Colorado, and Kansas, the areas designated as being in moderate to exceptional drought rose to 84 percent as of July 10 from 74 percent a week earlier.
In the Midwest, 63 percent of the region was in drought as of July 10, up from 53 percent on July 3. Key corn-growing states, including Indiana, Illinois, Iowa and Missouri, are listed as abnormally dry or worse. Yet within those regions, some states have fared better, such as Minnesota and North Dakota, where about 25 percent of each state is experiencing drought.
Iowa Governor Terry Branstad said he’s still assessing the scale of the drought’s economic impact, which he said varies throughout the state. “We’re starting to become concerned and we’ve seen some deterioration of the crops,” he said in an interview July 14 during the National Governors Association Conference in Williamsburg, Virginia. The drought looks “to have hit at a very key time,” in the growth cycle of corn and soybean crops, said Missouri Governor Jay Nixon in an interview during the same conference, and “could be dramatically affected.”
Corn for December delivery jumped 4.4 percent today to close at $7.725 a bushel on the Chicago Board of Trade. The grain has soared 53 percent since mid-June. More than three- quarters of the acres where corn is grown in the U.S. is in a drought zone.
The biggest U.S. crop, worth $76.5 billion last year, corn is the main ingredient in the feed of chicken, cattle and hogs. Meat, poultry and fish prices surged 7.4 percent last year and are expected to gain as much as 4.5 percent this year as rising prices make animal feed more expensive. Soybeans have risen 21 percent since mid-June and wheat has climbed 41 percent.
“Commodity prices play their way through to food,” said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, in response to a question after a speech July 13. “So my immediate concern is that would put upward pressure on food prices and could contribute to unwanted inflation in that subset of the broader inflation numbers.”
The resulting prices could have an effect on food retailers such as Popeyes Louisiana Kitchen and McDonald’s Corp. (MCD), which face higher meat costs. Cereal and beverage makers such as General Mills Co. (GIS) and Coca-Cola Co. (KO) face elevated corn and sweetener prices.
The drought is eroding the profit outlook for Archer Daniels Midland Co. (ADM) by boosting costs for the world’s largest corn processor, according to Topeka Capital Markets Inc., a broker-dealer with offices in Chicago and New York. The outlook for ADM’s adjusted earnings, based on the average of 13 analysts’ estimates compiled by Bloomberg, fell to $3.03 a share for the 12 months through June 2013, down 3.8 cents in the past four weeks, data compiled by Bloomberg show.
ADM, based in Decatur, Illinois, uses the grain to make more than two dozen products including ethanol, sweeteners and animal feed, and the company has businesses that store and transport the commodity for customers including farmers.
“Like others in the agriculture industry, we are monitoring the drought and the weather forecasts very closely,” Jackie Anderson, an ADM spokeswoman, said in an e-mail. Spokesman David Weintraub declined further comment on the impact.
Rising prices can benefit farmers who have successful harvests or took out sufficient insurance on their fields. Farm cash receipts are now expected to be a record $140.5 billion for the crop year of 2012-13, up 4 percent from 2011-2012, according to a report from JPMorgan Chase & Co. (JPM) on July 11.
Still, with such a wide swath of farmland facing damage, that may not matter much.
“Farmers have always said to me $7 corn is no good if I have no corn,” said Ann Duignan, the JPMorgan analyst who wrote that report, in a Bloomberg Television interview July 10.
Stocks for agriculture-equipment sellers initially rose as the drought drove up prices for soybeans, corn and wheat. Agricultural-machinery stocks as a whole are up 6 percent over the past month, according to data compiled by Bloomberg. Since July 5, Deere & Co. (DE)’s stock has fallen 6.3 percent.
As the impact of the drought on yields is unclear, “it would be premature to make predictions,” Ken Golden, a Deere spokesman, said in an e-mail. “Overall farm cash receipts are the best indicator of future sales of John Deere farm equipment. We have said in the past that our expectation for this year is that farm receipts will remain strong,” he said.
Although farmers’ cash receipts “will be higher, they are not going to spend on equipment because they don’t need it,” Karen Ubelhart, an analyst for Bloomberg Industries, said in an interview. “You are going to see people lower expectations for the full year.”
Next year farmers will boost equipment, seed and fertilizer purchases as they try to recoup in production what they lose this year, she said.
This year’s lost crops will force some farmers to take out new loans to get through a poor season, Wells Fargo’s Swanson said.
“In those areas hit the hardest by drought, we will have to work with those farmers to do some additional financing because they’ll be missing the revenue they were expecting,” he said.
Businesses in rural areas are already feeling the effects as farmers postpone purchases. Eric C. King, 56, co-owner of King’s Furniture on Main Street in Olney, Illinois, said he’s had three farmers’ wives say they were going to hold off on buying. “I can’t blame them,” he said. “It’s just a ripple effect. We’re not farmers but we’re farmer-based.”
Yet with agriculture’s modest share of the U.S. economy, a single season’s drought may have little lasting impact on the national economy, said Bruce Babcock, an economics professor at Iowa State University in Ames.
Even the impact on food prices will likely be fleeting, he said.
“If it’s a one-year drought you’ll see some impact on food-price indexes, but it will be a one-time shot,” said Babcock. “It won’t be a sustained inflation.”
Agriculture comprises about 1.2 percent of the U.S. gross domestic product, said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago.
“It may not be big numbers in terms of GDP, but when you look at these Midwestern states you have everything revolving around agriculture from banking, machinery and equipment, the warehousing, the transportation. It’s not as small as the numbers suggest.”