Ed Lotterman: Bad farming weather matters little

June 21, 2013 

It has been an unusually rainy spring, and planting of corn and soybeans is very delayed in many areas of the Upper Midwest.

It appears that as many as 3 million acres in my home state of Minnesota that typically would go into corn or soybeans won't be planted this year. That is about a fifth of the usual total for those two crops and some 15 percent of the state's total cropland.

Parts of Iowa, Wisconsin and Illinois are similarly troubled. Yet it isn't seen as a major problem for these states and certainly not for the nation. There is some interesting economics in all of this .

First is the basic question of what economists call "resource endowments." These vary greatly between nations. Some are well-favored. The United States has about 1.26 acres of arable land per person, Argentina, 2.3 and Australia 5.3. But the Netherlands has only .15 and Afghanistan only 0.5, even though most of the people in that country are farmers.

The U.S. has a lot of capital per person and also a lot of natural resources. Natural resource availability helps us be prosperous. But natural resources are not of overwhelming importance - as the five-times-higher incomes of resource-poor Netherlands show when compared with resource-rich Argentina.

Secondly, cold rainy weather like we have been having constitutes an "exogenous shock," an occurrence caused by some outside force that affects the economy. The attacks of 9/11, Japan's 2011 tsunami, the 1988 drought and the extensive flooding we had in 1993 are all examples of such shocks.

This one probably won't be particularly severe for the national economy because it is confined to the Upper Midwest. Some other areas, including much of Texas, continue to experience a drought. Three million acres lost in Iowa, Minnesota or any other state means a drop of at least $2.5 billion in that state's farm output and an even greater cut in its gross domestic product. But compared with a total of some $280 billion in final output, this is unfortunate,but not a serious blow.

Agriculture is extremely important to the U.S. economy, but its relative weight has fallen over time.

In the 1930s, when more than a third of U.S. households farmed, a bad crop year meant hard times for a significant share of the population. Now, a fraction of farmers, who already are a small fraction of the total population, will have a bad year. But no one will starve, and few will go broke.

That would not be true in an agricultural-dependent country like Afghanistan. If a fifth of Afghan or Bengali acres could not be planted, there would be widespread suffering. Urbanites would suffer along with farmers themselves, since food would be scarce and expensive.

In the U.S., we may see some increase in food prices, but it is likely to be muted. First, consider that the excessive rain over the Upper Midwest may well produce a larger crop than we had during last year's drought. Much still depends on weather from here on out, but total U.S. production of corn and soybeans may be higher in 2013 than in 2012.

Also, both corn and soybeans are commodities that - like oil - are widely traded internationally. Their prices largely are determined by global supply-and-demand. That generally means smaller price fluctuations than when trade is restricted or transportation costs are high.

Consumers in countries such as the Netherlands, that allow trade, face fewer shortages or price spikes than those in Afghanistan or Myanmar, where it is more restricted and transportation costs are higher.

This is doubly unfortunate for farmers who cannot plant all their acres, because they won't benefit from higher prices.

Last year, northern Corn Belt farmers who escaped the drought were in the enviable position of having a good crop in a year when bad conditions elsewhere drove prices up considerably. This year will be the opposite for some.

The financial effects of bad weather on farmers are reduced by federal farm policies, in this case subsidized all-risk crop insurance. Because of the high level of subsidy under current policies, most farmers, even those normally quite willing to tolerate risk, enroll in this voluntary program. So they will receive substantial payments that will offset much of the loss of their crops.

This is good for the farmers involved and for the communities in which they shop and buy inputs. But it reflects the distortions caused by current policies that transfer money from lower-income households to higher-income ones.

Indeed, the federal insurance program contains a provision with perverse incentives. For each crop and geographic region, the coverage specifies a date by which a crop must be planted to be eligible for 100 percent coverage. For most of Minnesota and Wisconsin, this date was May 31 for corn and June 10 for soybeans. It was even earlier in Illinois and Iowa. This is to discourage farmers from being lackadaisical about planting in ordinary times, counting on a partial payout if the crop is short.

Once this date is passed, there is a 60 percent coverage level even if no crop is planted at all. And not planting means some reduction in input costs for planting and harvesting.

So as one approached the cut-off date, the insurance motivated much pencil pushing to determine if it were better to just let the date pass and be certain of 60 percent coverage or pour more money into a late-planted crop that might not bring in much more. Milton Friedman is not the only economist who would be outraged by this, but neither would he be shocked.

Write Ed Lotterman at ed@edlotterman.com.

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