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August 9, 2012
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Drought: Agribusiness Expectations Get Scorched

Drought and record heat rewriting the initial forecast for record 2012 Kentucky farm receipts

By Kara Keeton

A Union County, Ky., cornfield that should be ready for harvest instead shows the stress of this year’s drought and weeks of scorching heat. At least 16 counties had temperatures topping 105 degrees in June and July. Early in the year, Kentucky farmers were expecting their largest corn crop ever. Photo by Kara Keeton

Talk to any farmer across Kentucky and the top challenge they have faced this year is weather, the perennial wild card for agribusiness. Freezes, drought and record heat are hitting hard at harvest expectations for 2012, which began with forecasts of the highest farm receipts in state history.

Instead, revenues might fall as much as 20 percent. Diversification of many operations will keep the results from being even worse.

“It has been a devastating summer for grain farmers, but the heat and dry weather has also taken a toll on our horticulture and livestock operations” said Mark Haney, Kentucky Farm Bureau president. “The adverse weather conditions didn’t begin with the heat of the summer; many farmers were also hit hard in the spring with the late freeze.”

Kentucky communities by the dozens approached, tied or set all-time temperature records in early summer. At least 16 counties were scorched by highs topping 105 degrees, according to data from the Kentucky Mesonet system of weather stations operated across the state by Western Kentucky University. The Calloway County station in Murray hit 107.2 on June 29.

Initial forecasts that farm receipts would top $5 billion have wilted. Weather conditions are having a significant impact across the board on the Kentucky agriculture economy’s bottom line.

Especially hard hit is 1.6 million acres of corn that commonwealth farmers planted, a 16 percent increase from 2011 and the most Kentucky corn acreage since 1986. Recent assessments rate a mere 1 percent of the crop Excellent, with 5 percent Good, 17 percent Fair, and 77 percent Poor or Very Poor, according to the National Agriculture Statistics Service field office in Louisville.

Nationally, 2012 is the worst U.S. drought year since the 1950s. Portions of Kentucky got rainfall the second half of July, however.

“It has been a devastating summer for grain farmers, but the heat and dry weather has also taken a toll on our horticulture and livestock operations. The adverse weather conditions didn’t begin with the heat of the summer; many farmers were also hit hard in the spring with the late freeze.” Mark Haney, Kentucky Farm Bureau president.

“If we continue to get rain across the state like we have had recently, then there is hope for the soybean crop, tobacco, pastures and some of our late vegetables and fruits,” Haney said. “As for the overall economic impact of the weather this year, we will just have to wait and see what happens.”

From hopeful to ‘devastating’

In the 2012 Economic Outlook released last December, agriculture economists estimated Kentucky’s cash receipts might have reached a record $5 billion last year in 2011. Producers saw almost across-the-board improvement in returns for corn, soybeans, wheat, cattle, horses, hogs and dairy.

Economists predicted 2011 net farm income would rebound to above $1 billion, an increase of more than 25 percent from the $780 million netted in 2010.

“The official data for the 2011 crop year will not be released until late August, but I don’t think we will make the expected 5 billion,” said Will Snell, UK agricultural economist. “I think we are going to fall a little short due to the timing of some of the sales of commodities, but I expect that we will exceed the $4.4 billion (in receipts) from 2010.”

As recently as early spring, only four or five months ago, Snell said he was hopeful economic growth in Kentucky’s agriculture sector would continue in 2012. That hope is gone.

“Everything was going well as the growing season began, and then you get hit with a dose of reality that this industry certainly cycles a lot due to factors we can’t control,” Snell said. “I guess we could hit $4 billion in cash receipts, but it is pretty devastating out there right now.”

Along with the weather impact, farmers this year are seeing no relief on the expense side. Input prices for all areas of farming are climbing, and that trend appears likely to continue. Because of drought condition here and in much of the U.S. midsection, corn prices will go higher and beef is going to go down, which has a negative impact on a lot of Kentucky farmers.

“To be honest, it is another year of struggle for all farmers, from fruit and vegetable to cattle and grain,” said Haney. “If you are a farmer though, you are in it year to year but you look at it from the bigger picture. We, the farmers, are in this for the long haul. Many are multi-generational farmers, and we do what we can to mitigate the risk and then just ride out the storm.”

Weathering a bad year with crop insurance

Ears of corn exhibit pollination problems because of drought and heat. Photo by UK College of Agriculture

Many horticulture operations, orchards and some forage operations faced major hardships after a warm spring was followed by a late freeze. Then in June, when temperatures started rising and rain eluded most of the state, farmers watched grain crops begin to decline, vegetable plants drop blooms and pastures dry up, the latter necessitating early feeding of livestock.

“We are all in the barrel this year, so to speak. I don’t think any operation has really escaped the impact of the weather this year,” Haney said. “The positive is that farm gate and commodity prices have been pretty good these past couple of years. So if you look at this from a statewide perspective, we are in a position to weather a bad year.”

Tough summer weather already has resulted in some farmers across the state losing entire crops, said Haney, who travels Kentucky talking to producers. The heat and drought losses farmers are seeing this year make crop insurance an integral part of risk management on the farm.

“Crop insurance is a way of life for producers,” he said. “This is why the Farm Bill is so important to our farmers. We need to ensure that farmers have programs like this to provide a safety net out there and risk management tools that they can depend on in times of extreme losses like we are seeing across the United States.”

Crop insurance and other assistance programs do not make up for all the losses that farmers are facing as a result of the extreme weather this year, but Haney said farmers today are much better off than in previous drought years when programs were structured differently or did not exist at all.

“I estimate that 88 to 92 percent of row-crop producers have insurance at some level,” said Cory Walters, UK agricultural economist. “Much like other insurance policies, the coverage all depends on the level of liability, and I say most farmers are in the 65 to 75 percent coverage level.”

A Kentucky crop insurance compensation total following this year’s devastating weather is difficult to estimate. Each operation’s payments will depend on the coverage level, insurance type and unit type chosen for its policy.

“We are still in the middle of the disaster, so at this time we do not have final numbers for the total devastation or level of crop insurance that will be paid out,” Walters said. “We do know that corn crop conditions for Kentucky are not good, and even with crop insurance some Kentucky farmers could lose money this year.”

While weather is landing a hard punch to agribusiness, it’s far from a knockout blow.

“The ag community in Kentucky has always responded well to adversity; we have had so much of that in our state. We roll with our punches,” Haney said. “At this stage of the game, everyone in Kentucky’s ag community is focused on what we can do moving forward through assistance programs and education to help mitigate this terrible year for the farmers.”

Risk management decisions are ongoing

“The weather has totally destroyed the grain part of our corn,” said Brennan Gilkison, a Clark County farmer. “We have salvaged some of our crop as silage and plan to take advantage of the cheaper cattle prices and use the silage as feed.”

Gilkison, like most grain farmers, uses several risk management tools in his operation to help offset losses, including crop insurance and contracts. While he has crop insurance on his corn acreage this year, Gilkison is happy he chose not to go the contract route this year.

“Some years we choose to take out contracts, but for some reason I didn’t this year,” he said.

Not all grain farmers are as lucky as Gilkison on the contract side. Even those who chose to take out conservative contracts on their crops are now potentially looking at having yields far below their estimated contracts, as a result of the weather. They are having to make hard decisions as to whether they sell their contracts now at a loss or gamble on if their crops will produce enough to meet their contract yields.

“I’m very fortunate that I didn’t pull that trigger this year,” said Gilkison. “The crop insurance will help cover our losses, and we can make the silage we salvage from our corn crop work for us on the farm.”

Gilkison is hopeful recent rains and cooler temperatures will help his soybeans to continue to grow, and at this point his burley tobacco is still looking good.

“I think what is key to our operation is that we are diversified on our farm,” said Gilkison. “We have grain, tobacco and beef cattle. We are diversified enough to manage risk from a failing crop.”

Diversification makes double whammy survivable

The weather challenges began in early spring for Kevan Evans of Evans Orchard in Scott County. He saw over half his peach crop disappear in a single night, and a large percentage of his other fruit trees suffering damage.

“We were lucky that we didn’t lose more trees. There are some farmers out there that lost 80 percent of their crop this year,” Evans said. “Yet with orchards all over the (U.S.) Northeast impacted by the freeze, it is going to be a challenge for us to find apples and peaches to supplement our losses to meet the needs of our customers.”

If losing more than 50 percent of tree production wasn’t enough for Evans Orchard, drought and extreme heat took a major toll on its vegetable and berry production. Evans irrigated vegetables and berries during the drought, but that did not protect crops from the extreme heat of early summer when much of the state experienced multiple consecutive days of 100-degree-plus weather.

“There were days when the heat was so extreme that the blooms were just falling off the plants,” said Evans. “There is no amount of irrigation that will protect from the heat, so that just is a double whammy for the vegetable and berry crops.”

Weather-impacted crops often create further challenges for farmers in meeting customers’ retail expectation, Evans said. Despite hard work in difficult weather conditions such as Kentucky has had this summer, farm managers can not guarantee products are available during their regular season. In addition to limiting production, heat and lack of rain can impact the quality of products that do make it to market.

“Our beans this year on a whole have not been the quality our customers have come to expect,” Evans said. “Consumer education, really helping people understand how their food is produced, is especially important during adverse weather conditions. At times this level of consumer education can be as big of a challenge for the retail farmer as the challenges we are facing in the field.”

Evans knows that his overall production has been hit hard this year by the extreme weather, but he is not sure what the final impact will be to their bottom line.

“We have diversified our operation with agritourism activities and value-added products, so our bottom line isn’t dependent just on the sale of the fruits and vegetables from the farm” said Evans. “Don’t get me wrong: This season hasn’t been easy, but our diversification efforts on the farm are what help us survive challenging seasons like we are facing.”

Kara Keeton is a correspondent for The Lane Report. She can be reached at editorial@lanereport.com.

 

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