Drought dims U.S. farm economy hopes

July 16 (Bloomberg) -- 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. 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.

Since 1988

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.

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