Special Report II: The Katrina Ripple
How many of you have ever thrown a stone in a farm pond on a lazy summer day? You see a big splash and then a series of ripples radiating out from the center. Well, that is a close analogy to the “Katrina Effect” in the next six months to five years in the United States and world economy.
Let’s assess the impact on agriculture and the general economy here and abroad. The initial splash is being felt nationwide with higher gasoline and diesel fuel prices, particularly with harvest in the Midwest going into full swing. Costs will be up and revenues down, impacting net farm income by 10-15 percent because of the clogged port and increased cost of harvest.
The second ripple will be the possible increase in the cost of transportation. Grain transportation by barge through the river system is much less expensive than by rail and truck. Watch the progress of service workers returning to man the port terminals and oil refineries. Many have been relocated and how many at what cost could have a major inflationary impact on the agricultural and general economy.
Watch your long term winter weather forecast for the Upper Midwest and Northeast. A large amount of the propane and refined fuels shipped to the Northeast and Upper Midwest come from the Gulf region. Expect heating bills to increase by about $700/household this winter.
In the longer term, fertilizer, chemical and fuel cost could be a tidal wave in planning for next year’s crop. In a seminar in Mahnomen, MN, a producer indicated that fellow producers near Rochester, MN were estimating the cost of growing corn could be $485/acre. What yield at what price could breakevens be next year? One of the areas for wiggle room will be on cash rents. Landlords may find it difficult to demand higher rents and may have to take less.
The ripple is going to be felt worldwide as some of the larger insurers affected were from Europe, such as Lloyd’s of London. Europeans can expect insurance rates to increase by 15 percent and high-risk areas in the U.S. can expect the same, thus increasing overhead cost.
Finally, to rebuild, at what cost and what sections of New Orleans and the Gulf Coast? Debate is going to occur with individuals who desire to have the wetlands and barrier reefs rebuilt. Can this be done economically without changing shipping lanes? As one reader of this column stated in an e-mail response, “Should a city be rebuilt below sea level?” A few years ago, Dr. Elwyn Taylor, the meteorologist from Iowa State, said we are entering a 30-year active hurricane period both in numbers and intensity. This might be a question that will create a debate ripple in disaster management circles.
P.S. To my former student Andrew Rice, Cornell graduate, I hope this gives you insight to some of your questions. Keep up the good thinking!!
Trip to Mahnomen, MN
Wow! Congratulations to First National Bank of Mahnomen and the supporters of a successful seminar. Think about 200 people attending a seminar in a town of 1072! Good work Walter and your team!
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
To see Dave Kohl's previous road warrior adventures type Dave Kohl in the Search blank at the top of the page.
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