The 2012 drought was obvious. It was hot and dry this summer. Crops and pastures burned up and the agricultural economy will feel it for years to come. Currently we are worried how livestock producers will fare. We are worried about the seed supply for 2013. And we are worried whether the subsoil will have enough water next spring to keep a crop growing. But what about the rest of the economy? How far down have the roots of the drought grown?
Every community will have a story about the drought. Mine is suffering from a 3-ft. drop in the level of the lake that supplies water for 85,000 people and major grain-processing plants. So water-use restrictions have been in place for weeks because the lake has more mudflats than waves.
Economists David Swenson and Liesel Eathington of Iowa State University have tallied the extent of the drought, but not the total impact, since that may not be seen for years. However, it is possible to determine what parts of the economy and day-to-day life that it has impacted to some degree. Their analysisis based in Iowa, but could be in any Corn Belt state. After all, 2,341 counties in the U.S. have either been designated by USDA as primarily or secondarily impacted from the drought. The economists say, “The initial impact of a drought is a sharp reduction in the state’s water supply, which in turn has immediate impacts on agricultural productivity, commercial activities that require water, and public goods that are water-based.”
The primary impact is on crop yields and reduced forage and pasture, which have resulted in higher prices due to shortages of production. They say the higher prices will offset portions of losses, and they calculated prices that were 20% above breakeven prices due to the drought, which they indicated would result in higher, gross revenue consequences. Additionally, they said with 90% of Iowa corn acres and 91% of soybean acres covered by crop insurance the policies covered nearly $14 billion in total liability and will boost farm income.
High grain and hay prices impact the livestock industry negatively, say the economists. With corn and beans being primary components of feed, livestock producer margins will decline as prices rise. But without adequate forage, many other livestock will suffer from herd liquidation where forage is unavailable. The economists say, “One can conclude that animal production in Iowa will decline, though the magnitude of that decline is still unknown, as will be the overall impacts of those reductions to the state’s gross domestic product.”
They also say yield reductions will be felt by orchards and horticultural crop production, but irrigated production may not suffer significantly provided water supplies are sufficient. The non-irrigated crops will realize yield reductions and affect the quality and quantity of those crops.
The most vulnerable non-farm industries include the ethanol refineries that have to pay higher costs for corn and the biodiesel plants that have to pay higher costs for soybeans. The seed industry may see increased costs and production disruptions and impacts on research plots.
Iowa’s insurance industry will also be affected because of the impact on crop insurance. They say the industry will not change markedly, the indemnity checks to be mailed out will deplete reserves and more adjustors will have to be hired to process claims.
Low water levels may also affect a state’s tourism and recreation industry, with reductions in sales. The same low water will stifle commercial barge traffic on the Mississippi River. They say that will reduce sales and gross revenue for operators and increase the operational costs for companies requiring shipping.
Businesses that sell trees, plants and flowers have suffered from the poor growing situation, and costs of production and maintenance have resulted in less business, as have landscapers. But power companies have seen increased business due to electricity sales for air conditioning. Their profits should increase.
Public water supplies have been stressed, and many others have had to cope with high use from customers wanting to maintain lawns and gardens. With public use of water facilities for recreation, the depletion of lakes and streams has resulted in lower use. The drought has affected fish and other wildlife dependent on the water.
Public infrastructure has been damaged because of the heat that has buckled many roadways and caused cracks that will result in highway deterioration.
Homeowners have increased home cooling costs due to the heat, along with increased water costs. But they will also be losing tangible assets such as trees, plants, shrubs and gardens that may die due to the heat and lack of water.
Other ripples through the economy will come with the reduction of livestock production, and the subsequent reduction of the demand for commercial feed. The economists report, “The widespread reduction in crop yields in Iowa will reduce harvest times, it will decrease grain hauling, and there will be less demand for grain storage. Farther on, reduced yields, especially in the eastern part of Iowa, will decrease the demand for barge transport. In the nearer term, warehousing and shipping might see the greatest impacts from reduced farm quantity production.”
As livestock producers reduce their herds, more animals will find their way to slaughter in the near term increasing the demand for meat industry employment, but after the high volume, there will be a downturn in volume and less demand for labor.
The economists also point to the grocery store, and say, “Initial reductions in animal herds will result in higher meat supplies and lower prices. However, over the long run, there will be constrained animal production, which will lead to higher meat prices. In addition, as high grain prices will work their way through the entire food processing industry, consumer food prices broadly are expected to rise.”
The economists also predict government help for those suffering from the drought, particularly in an election year. However, as we close in on the election, there seems to be less chance of any federal drought relief.
The impact of the drought is not only felt in crop and livestock production, but in water supplies and recreation, as well as in grocery stores and even family budgets. Some impacts will be felt immediately, but others not for some time to come.