Policy Brief Vol. 5, No. 40:
October 17, 2002
Drought Impact Always in Flux
It's been one of the big questions of 2002: How much has this year's drought cost Nebraska farmers?
No one knows for sure. And even if we had an ironclad answer today, it would change tomorrow. That's because the weather and commodity prices never stay the same. Crop revenue prospects either improve or fall with each passing day.
Overall, the drought's impact looks less severe at harvest time than it did at mid-summer. No, it's not because we received widespread crop-saving rains during the second half of the growing season.
Based on the U.S. Department of Agriculture's October crop forecasts, production of each of Nebraska's major crops will drop significantly from last year. Corn production will fall 20 percent from 2001. Both soybean and wheat production will dip 22 percent. Sorghum production, in part because of lower planted acreage, will be down a much larger 59 percent. Hay and minor crops also are experiencing production shortfalls this year.
What has changed since July are commodity prices. Corn is good example. Cash prices have moved irregularly higher and now approach $2.50 per bushel in many parts of the state. That's a full one-third higher than last year at this time. Soybean prices are 20 percent to 25 percent higher. And if cash wheat prices reach $5 this fall – a level that no longer seems out of reach – that would represent a doubling from last year.
The bottom line is that many corn and wheat producers now have an opportunity to gross more from this year's crop than last year's.
Soybeans, however, appear to offer less opportunity for higher returns. That's because the relative decrease in production is about the same as the relative increase in prices. In addition, the government support program compensated producers for last year's relative low soybean prices through a hefty loan deficiency payment. In short, cash soybean prices will need to reach $6 per bushel for average gross returns to be comparable to 2001.
The discussion above focuses on averages. However, it's obvious that many farmers experienced crop losses far greater than average. Moreover, crop insurance coverage varies by crop, type and level. Based on total insurance liability in the state as reported by USDA, it appears that around 70 percent of the expected value of this year's production was covered by insurance. But for farmers with losses and coverage below 70 percent, the impact can't help but be severe.
Moreover, neither hay nor grazing losses are covered by insurance. Approximately half of all land in the state is used for one or the other of these purposes.
Taking all these factors into consideration, my latest calculation of the drought's cost is just under $600 million. It could be more or less than that, but for now it's my best shot.
10/17/02-RF/VM
Roy Frederick - Ph.D.
Agricultural Economics
Professor
(402) 472-6225
Vicki Miller Research Communications Coordinator (402) 472-3813
Department: Agricultural Economics
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