The drought caused a variety of problems for producers, but for financial professionals it raised a few questions about what to expect in the future.
In a new Main Street Economist report, Kansas City Federal Reserve economist Nathan Kauffman says that income disparity between grain and livestock producers has farm balance sheets, lending and investment activity shifting.
The changes between the two sectors skewed different numbers – crop producers saw increased farm income and rising farm values, while livestock producers sought short-term loans to cover rising feed costs. Kauffman says these factors may shake up farm profits in 2013.
Concrete information about changing farm profits came with USDA's August and November projections that estimated net farm income would be near record highs. Even after the trying drought of the summer, and continuing drought for some areas, the November projection still forecast net farm income to be $114 billion, with cash income at $132.8 billion.
The drought may have changed overall predictions for farm income, but it also changed the scene for farm finances in general.
"The drought diverted spending from investment to operating expenses, reversing the downward trend of short-term lending activity in the third quarter. Overall debt concern was relatively subdued, however, amid record low interest rates," Kauffman wrote.
A key contributor to balance sheet shifts was rising farmland values, Kauffman noted. "Booming farm real estate prices boosted farm assets almost 5% in 2012, and farm real estate now constitutes more than 85% of total assets, compared with 75% on average during the previous four decades," he said.
Those soaring farmland values were just one factor in the financial picture for farmers. It seems as though a central player, too, is the shift in crop profits that may change yet again for 2013.
"After several years of strong prices, crop farmers’ revenues may shrink next year. Futures markets suggest that corn and soybean prices could fall by 10 to 15% by next fall, with the potential for further declines depending on planting intentions," Kauffman wrote.
He says this change could lead a turnaround for livestock producers, and overall, will shape farm lending and investment behavior. He notes that futures markets also suggest livestock prices could remain high.
"If feed costs decline and livestock profits improve, short-term operating loan demand from the livestock sector could dwindle. Conversely, higher input costs and lower crop revenues could spur operating loan demand for crop producers. In addition, as farm booms mature, farm capital spending levels have tended to remain strong as farmers use debt instead of cash to finance capital investments," Kauffman wrote.
Still, Kauffman says the biggest player in the entire situation could be weather. Low soil moisture and a potential for drought to affect 2013 crop development could keep prices high.
"On the other hand, crop prices could plummet if weather patterns return to more normal conditions, producing record yields on a record number of planted acres. In that case, crop farmers might find themselves admiring the profits of livestock producers," Kauffman says.
He estimates that weather might actually be a turning point and the biggest risk to current farm income projections. "If rainfall does not come soon," Kauffman wrote, "the drought and its effects on crop prices and livestock incomes could persist well into 2013."
Read the entire report here.
Farmers weathering 2012 are learning plenty about everything from crop insurance to seed genetics as parched conditions reshape farm business across the country. Consider our 5-part approach to moving ahead after the toughest drought since the 1930s.