SHENANDOAH, Iowa — This year's record-setting heat and drought may actually bring good results for the Midlands economy.
Although some farmers will see incomes drop, a combination of factors — including the availability of crop insurance — mean that overall, farming is headed for a highly profitable year in 2012 despite this year's widespread lack of rain.
That would be six straight years of strong farm income and the continued economic boost that keeps unemployment low in Nebraska and Iowa and supports housing prices and retail businesses in Omaha and other cities. In general, the ag sector has buffered the Midlands from the worst effects of the national recession and slow recovery.
Nobody understands the rosy agricultural outlook better than the 80 people at the Elks Lodge here last week who saw local farmer Bill Dreyer bid $2.1 million for 210 acres of nearby farmland. He's paying $12,000 an acre for the most productive parcel, the highest price that auctioneer Patrick Maher of Imogene, Iowa, has handled in his 35 years in the business.
“I think I'm crazy for doing this,” Dreyer said of his winning bids. “But I've been driving past that farm for 60 years and always wanted to own it. That kind of land doesn't come up for sale very often, and I've got some money lying in the bank that isn't doing anything.”
He's not the only farmer with cash, after five years of good farm income. But this year's harvest picture includes drought damage that will mean payments to many farmers under the federally subsidized crop insurance program.
Crop insurance may pay out a record $20 billion in claims this year, according to some estimates. The insurance payout is one reason for an official estimate that U.S. farmers' net income this year will total $122 billion, beyond even 2011's record year for farm profits.
The drought also has caused high grain prices. That means extra income for farmers whose crops survive the drought, such as those with irrigated fields, drought-resistant seeds and successful moisture-conserving farming techniques.
Even partial yields can turn out to be money-makers, given the high prices, strong global demand for grain and lack of stored-up corn and soybeans from previous harvests.
“There is an opportunity for many ag producers to do very well this year, even with the drought,” said Gothenburg, Neb., banker Matthew Williams, who becomes chairman of the American Bankers Association next month.
High prices and crop insurance payments will mean higher farm income than last year, said Joseph Glauber, the U.S. Department of Agriculture's chief economist. That's despite drought damage that he estimated would reduce the U.S. corn crop to its smallest since 2006 and its smallest per-acre average since 1995.
Yet crop insurance has its critics, who say that the USDA should use that tax money for conservation or other programs, and that the subsidies give farmers incentives to plant on wetlands, grasslands and other marginal property.
“The exploding cost of crop insurance has the potential to squeeze out public investments in other priorities that we think are critical and produce greater public benefits in the agriculture area,” said Craig Cox of Ames, Iowa, senior vice president with the Environmental Working Group.
Instead of subsidizing farmers' crop insurance premiums, a $7.4 billion expense last year, and paying claims beyond that covered by insurance companies, Cox said, USDA funds should go for more research, conservation, environmental protection and better school food.
The Senate's proposed 2012 Farm Bill would make some minor changes to the program, but the House of Representatives has not acted on its version. In general, the movement in Washington is away from emergency disaster relief and from direct payments to farmers.
U.S. Sen. Chuck Grassley, D-Iowa, recently said that crop insurance provides income stability and “helps protect jobs all along the economic chain in rural America.”
Bob Young, chief economist for the American Farm Bureau Federation, which represents a broad cross section of the agriculture industry, said 2012 will prove the benefits of crop insurance.
“For those folks that have significant crop loss, it's going to provide them with a really solid level of benefits and help them make it through the year and be ready to plant next year,” Young said. “Otherwise, they would have been in some real financial hardship.”
Crop insurance needs subsidies because of the risks and the dollars involved, he said. An insurance company couldn't pay the claims without charging premiums that farmers couldn't afford. He said the risks of farming aren't like the risks covered by, say, auto insurance.
“This drought is a classic example,” Young said. “It's like everyone in Omaha deciding to run out this afternoon and half of them driving into a post.
“When you have a drought, pretty much everybody gets whacked by it. You really have to have a reinsurance company with some very deep pockets to be ready to stand up and provide that support, and the only one with deep enough pockets is the government.”
Crop insurance is one reason that the 2012 drought hasn't hurt prices being paid for farmland, said Steve Bergren of Bergren Real Estate & Auction in Griswold, Iowa. “There's demand for real estate, and what's driving it is $7 or $8 corn and cheap interest.”
He presided over a recent auction where a local farmer bought a 185-acre, non-irrigated farm near Griswold for $13,500 per acre, a record price for that part of Iowa. The price of good farmland is up 20 percent from last year, Bergren said, “but it ain't going to go up forever.”
Creighton University economist Ernie Goss said crop insurance is a factor in keeping farmland prices up, but prices paid also depend on how farmers see the future, including the possibility of a long-term drought. “Is this the first year of a trend of low moisture, or is it an aberration?”
His recent surveys of rural bankers indicate some pullback in ag-related spending because of uncertainty over the drought and because of stress among livestock producers. “Just because you receive good revenue from crop insurance, you may not be as keen to use that crop insurance money for new equipment,” said Goss.
In Nebraska, the effects of the drought will vary. Greg Kruger of North Platte, a crop specialist for the University of Nebraska-Lincoln, said farmers in the western part of the state plan for low moisture every year, planting crops less densely, leaving plant debris in the fields and using fast-maturing seeds. But soil moisture in parts of western Nebraska this year was the lowest on record, according to figures that go back to the 1950s, he said.
The drought means challenges even with irrigated land, such as the fields Mark Jagels farms near Davenport in south-central Nebraska. To make up for the lack of rainfall, his center-pivot irrigation systems ran more this year than the past two seasons combined, an added expense.
He also raises cattle, which means he is coping with high prices for hay and feed and drought-damaged pasture. Many ranchers are selling off their herds at low prices because they can't afford to raise them at today's costs. “It's a tough situation,” he said, for livestock producers who have no comparable federal insurance program.
Like most farmers, Jagels sold much of his 2012 harvest earlier this year, before prices rose. That forward-selling is part of a farmer's standard toolbox to manage the riskiness of agriculture, Jagels said, since prices sometimes drop by harvest.
“You never know,” he said. Instead of today's $7.50-plus for a bushel of corn, the price might have fallen below $3.
Jagels said he will have some bushels to sell at this fall's “spot” prices, and his early sales will cover his planting expenses.
He has harvested his dryland acres, getting about 30 percent less corn than average. He started harvesting the irrigated acres Sept. 10, and so far the yields have been “excellent,” he said, even better than the last few years.
Jagels likely won't see enough damage to file a crop insurance claim based on the dry weather. “It's just like health insurance. You hope you never have to use it, but it's there if you need it.”
Crop insurance may seem like a bargain, since the federal government subsidizes it by paying 62 percent of the yearly premiums. But farmers may have a claim only once or twice a decade, even though they pay premiums every year.
So far this year, the federal government has paid $6.8 billion in premium subsidies, with U.S. farmers paying $4.1 billion in premiums. Of that, Nebraska farmers have paid premiums of $270 million and Iowa farmers $380 million, with federal premium subsidies of $395 million for Nebraska farmers and $519 million for Iowa farmers.
Glauber, the USDA economist, said the circumstances of droughts can vary. Last year, for example, many Texas producers had severe losses, but most other parts of the country didn't. This year, the losses may be “shallower” but much more widespread.
And crop insurance terms vary, too. In 1988, the last comparable Farm Belt drought, fewer farmers enrolled, and they raised smaller crops in those days. The 1988 drought cut corn production from 7.1 billion bushels to 4.9 billion bushels. That's less than half of this year's projected, drought-reduced 10.7 billion bushels.
Those are the sorts of sharp economic variations that can be smoothed out by crop insurance, said Williams, the Nebraska banker.
“We've been through a very strong cycle with agriculture,” he said. “We can't expect it to be this good year after year.”
George Crawford, a farmer and auctioneer from Clarinda, Iowa, helps manage a farm owned by his family. He said crop yields there and in nearby fields are down by about one-fourth in many cases. But the insurance he bought doesn't cover losses of 25 percent or less.
“We probably won't collect a dime,” he said. “But it lets you sleep at night, and it lets the bankers sleep at night.”
Crop insurance has been a factor in keeping the farm economy healthy for the past five years, Crawford said.
“We've been bulletproof in this last recession,” he said. “Income in the ag sector has insulated us from the downturn in the economy, and there's a lot of capital out there.”
Contact the writer: 402-444-1080, firstname.lastname@example.org