ISU, Creighton economists weigh in on drought impact
July 28th, 2012 by Ric Hanson
Two Midwestern economists say the drought that’s hit the region will “absolutely” be felt beyond the farm and will be a damper on the national economy. Ernie Goss, an economist at Creighton University, says his research finds the drought hitting beyond the farm field, impacting other businesses like ethanol plants and farm equipment dealers. “Depending on the weather, we’re going to see some significant impacts,” Goss says. “And this is going to roll across the U.S., all the way from Wisconsin, Indiana, Illinois, Nebraska, Iowa, Minnesota — less impacts up further north — (and in) Missouri, very significant impacts, so this will have some impacts on GDP.” The latest report, released Friday, shows the country’s Gross Domestic Product increased by one-and-a-half percent in the second quarter.
There was a drought last year in the south, Texas was especially hard hit, but Iowa State University economist Bruce Babcock says this year’s drought will have a far wider impact because corn and soybean losses will be significant. “I think Midwesterners mainly felt the southwest drought because now we’re experiencing higher beef prices over the last six months because the herds got culled and we’re now at our smallest cattle herd size in I don’t know how many years,” Babcock says. “…Now we have a potentially another round of shrinking the cattle herd again, but also because of higher feed grain costs, and so this should be a wider-spread event.” According to Babcock, it’s the smaller producers who are most likely to get out of the cattle or hog business this year.
A U-S-D-A report recently estimated food prices would climb five percent because of the drought, but Babcock suggests that impact is under-estimated because the calculation was made before the full extent of crop losses became clear. “It’s really the livestock sector that’s going to be taking the big burden here through higher feed costs,” Babcock says. “It’s not necessarily the crop sector. Even though the drought’s there, it’s not like we’re going to produce zero and what we do sell is going to be sold at a higher price and so crop income is going to be somewhat buffered.” Babcock estimates more than 90 percent of Iowa grain farmers bought crop insurance for this growing season. Skyrocketing feed costs will lead to increased prices for not just beef and pork, but for many other grocery store items, including eggs, milk and cheese.
Each month, Goss and some of his colleagues at Creighton University survey bankers in the Midwest and his July survey is nearly complete. “These are bank CEOs in rural portions of 10 states, average community size 1300. We asked them the impact of this drought. We asked about the impact on ethanol plants and biodiesel and two-thirds of those with ethanol and biodiesel plants in their area reported there were either cut-backs or shut-downs — temporary shut-downs, of course,” Goss says. “…We have an ag equipment sales index. (It) dropped to recession levels this month.” Goss and Babcock made their comments on the Iowa Public Television program, “Iowa Press” which aired Friday night and will be replayed Sunday at noon.