Agriculture • Drought may hit farm profits harder than thought
Drought may hit farm profits harder than thought
The financial losses to US farmers from this year’s devastating drought may be deeper than some corporates have prepared for, thanks to a failure among growers in worst-hit areas to take out crop insurance.
Some 30-35% of corn in Illinois and Indiana, where crops have been particularly hard hit by drought, is not covered by insurance, analysis of official data by broker Allendale showed.
The two states account for 19.2m acres of corn sowings this year, or 20% of the US total, according to the US Department of Agriculture.
While some other farmers are covered by revenue protection policies, "the takeaway from this information is that the agricultural community will likely have some dark spots in the months ahead", Paul Georgy, the Allendale president, said.
"There will be bankruptcies" among farmers, he said, with the potential even for insured growers to suffer significant hardship if the corn rally crumbles over coming weeks, with the monthly average value in October used as a basis for payouts.
The comments follow assertions by some commentators that, thanks to insurance, US growers stand to lose little from the drought.
Maurice Taylor, the chairman and chief executive of tyres group Titan International, forecast last month that the drought may even bring a net benefit to farmers as soaring crop prices more than offset the impact of lower yields.
"I have been visiting farms in North Dakota, Minnesota, Illinois, Michigan and Ohio and I believe the net income to farmers will be equal or greater than the record last year," Mr Taylor, a former US presidential hopeful, said.
"Yes, there will be farmers who will lose their total crop, but they most likely have crop insurance."
Last week, Deere & Co, the world’s biggest farm equipment group – while cutting by $8.0bn its forecast for US farm profits this year – said that, at $102.3bn, they would prove the second biggest on record.
‘Dent in farmland price growth’
However, Mr Georgy said that he was already hearing talk of farmers cancelling orders for farm equipment, and of cautioning that they will be unable to pay farm rents, or at least delaying payments.
"A lot of rents may be due on November 1. Even for farmers who have insurance, they will not have received their payouts by then," he told Agrimoney.com.
Last week, research from Nebraska’s Creighton University showed farm equipment sales in the major US agricultural states falling to their lowest since October 2008, during the world recession, with the farmland market at its weakest since July 2009.
"The drought is putting a dent in farmland price growth and the purchase of agriculture equipment, including trucks," said Creighton economist Ernie Goss said.
Furthermore, some 41% of bankers surveyed said that the drought had encouraged greater borrowing by farmers, up from 29% last month.
‘Not a stupid risk’
Mr Georgy declined to condemn farmers for failing to take out insurance, which typically costs roughly $40 an acre.
"It was not a stupid risk. A farmer on 3,000 acres would have to pay $120,000 – not an insignificant sum of money.
"Indiana and Illinois do not normally get these types of problems. They have not seen anything like this in 20 years."
Statistics: Posted by yoda — Wed Aug 22, 2012 3:19 pm
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