Droughts Have Few Financial Impacts on Farmers

September 11, 2002

COLUMBUS, Ohio - A drought may make a growing season seem pretty ugly for a grower - affecting crop performance that impacts production, shrinks yields and ultimately creates economic problems.

But the weather occurrence, as it impacts the farming sector overall, causes little, if any, financial hardships to crop farmers as a group, except when it comes to government payment losses, says an Ohio State University agricultural economist.

"The conventional wisdom is that droughts are bad for crop farmers. There's no question that if you happen to be the farmer at the center of a drought, it's a bad year.," said Carl Zulauf. "But while clearly acknowledging that farmers at the wrong end of the drought distribution are negatively impacted, droughts do not tend to cause financial hardship for farmers as a group except for the loss of government payments." Zulauf analyzed over 30 years worth of data correlating droughts and market cash receipts (price times production) and found that during years of drought, market prices increase at the national level by an amount that offsets declines in yields and production.

So, although production declines in drought situations, an increase in market prices makes up for the decline so that producers' cash receipts from the market barely changes and may even increase. For example, USDA's May supply and demand report predicted market cash receipts to corn producers of $19.4 billion (forecasted price times forecasted production). In the August report, market cash receipts were predicted to be $22.2 billion, a 15 percent increase, even though production was estimated to have dropped by 11 percent from May.

"Why?" asked Zulauf. "Because the percentage increase in price exceeded the percentage decrease in production." Corn prices in August were projected to be $2.50 a bushel for the forthcoming crop year compared to the $1.95 season average projected by the USDA in May.

The same holds true for soybeans. Soybean cash receipts were predicted in May to be $12.7 billion and in August the number was at $14.7 billion, a 16 percent increase, although production was predicted to be 8 percent lower than in May. Projected prices in August were $5.60 a bushel compared to $4.45 three months earlier.

Though it does not appear that growers as a group are worse off financially during drought situations based on cash market receipts, one thing that does economically impact farmers negatively are the loss of government payments tied to marketing loan rate and target prices, said Zulauf.

"In times of drought, these government programs create a risk for farmers that probably would not exist if the programs did not exist," he said. "What causes the risk is that, as market prices rise, loan deficiency payments and counter-cyclical payments decline. Farmers expected to receive these when they made planting decisions. While higher prices mean more revenue from the market, it means less from the government. And government revenue usually declines more than market revenue increases." For example, including loan deficiency payments and counter-cyclical payments that were expected by farmers in May means that total gross income of U.S. corn producers actually decreased by 5 percent, from $23.4 billion to $22.2 billion. Total gross income of U.S. soybean producers also decreased by 5 percent from $15.5 to $14.7 billion. Based on the August report, loan deficiency payments and counter-cyclical payments are expected to be zero.

Thus, government programs that are designed to help farmers actually create a systemic or market-wide risk when a drought occurs. In essence, the government program removes the natural hedge or correlation between per unit revenue and yield.

"The creation of this systemic risk is an economic explanation for why Congress passes ad hoc disaster assistance when a drought occurs," said Zulauf. "However, the creation of this systemic risk also raises questions about the efficacy of loan and deficiency programs. We should be designing programs which remove this negative impact." While most of the attention has been focused on how the drought is affecting crop producers, Zulauf said that livestock producers are being hurt by the drought.

"The average U.S. livestock producer is being negatively impacted by the drought because the cost of feed has increased, which reduces their bottom line," he said.

Ohio livestock producers are being affected more than the average U.S. livestock producer because feed availability is being cut more here than in the United States. For example, in its most recent crop progress report USDA rated 68 percent of Ohio's pasture fields as poor to very poor compared to 21 percent at this same time last year. In contrast, USDA rated 49 percent of U.S. pasture and range land as poor to very poor in 2002.

"Ohio farmers got a lot of first crop hay but the quality was poor because of too much rain. Later cuttings have been curtailed by drought across many areas of Ohio," said Zulauf. "Depending on where they are located and how severe their situation is, Ohio livestock producers are going through some very difficult times."

Author(s): 
Candace Pollock
Source(s): 
Carl Zulauf