By Christine Stebbins
CHICAGO (Reuters) - Crops are taking a beating in the worst drought since 1988 but most farmers are not sweating like they did 24 years ago when a drought hit as they were just starting to recover from a farm depression that brought down a big slice of the Midwestern economy.
While financial losses from the 2012 drought in the world's largest food exporting nation will no doubt top the $40 billion of losses in 1988 -- an inflation-adjusted $78 billion today -- U.S. farmers face this drought in their strongest financial position in history, buoyed by less debt, record-high grain and land prices, plus greater production and exports, according to agriculture bankers, farm managers and economists.
In addition, much stronger crop and livestock insurance programs than in 1988 will make a huge difference - and some lucky farmers, by collecting insurance but selling remaining harvests at record prices, may even come out ahead of last year, economists say.
Hardest hit will be the dairy, beef, hog, poultry and fish farmers squeezed by soaring feed costs. But they too are better insured than 24 years ago.
"The farm economy is much healthier than it was in 1988," said Dave Miller, director of commodity research for the Iowa Farm Bureau, who worked through the 1980s. "We were coming out of the farm crisis. You had an extended period of low prices for grains, particularly 1985, '86, '87. There was severe financial stress in the ag economy and land prices that had plummeted about 60 percent in many of the Midwest areas. It's much different today."
Jason Henderson, chief economist at the Kansas City Federal Reserve, agreed.
"On aggregate we are very strong, but there are going to be those pockets. The livestock sector is going to be the most challenged," he said. "Right now the debt-to-asset ratios are at all-time lows, which means farmers are in one of their healthiest time periods from the crop side."
In 2011, U.S. farm income totaled $98.1 billion, a record high - even with significant crop and pasture losses from drought in Texas and other states. U.S. farmer assets are estimated at $2.2 trillion for 2012, with a debt-to-asset ratio of 10.3. In 1988, farm assets totaled $655 billion and the debt-to-asset ratio was 16.9.
Phil Burns, chief executive of F&M Bank in West Point, Nebraska, recalled living through the 1988 drought at a time when the farm crisis was just starting to ease up after the Fed Reserve hiked interest rates sharply to halt inflation but caught thousands of overextended farmers with the move.
"We had just come through a devastating economic blow and came up with a short crop," he said. "The difference now is this crop is coming on the heels of some of the best times agriculture has ever seen.
"In that regard this isn't adding insult to injury like it did at that time," said Burns, who lends to corn and soybean farmers and many small feedlots which annually fatten up to 6,000 cattle each.
Jim Farrell, chief executive of Farmers National Company of Omaha, the top farm management company in the United States, was a farm manager in southern Minnesota during the 1988 drought.
"There were still people being foreclosed on and losing land but it wasn't like 1986; we were starting to recover," Farrell said of 1988.
Farrell noted that grain farm balance sheets and much better crop insurance will be keys this time around.
"The older farmers should be well capitalized to be able to make it through a stress year like this. Maybe some of the younger producers or more aggressive producers might have some capital problems, where they haven't carried enough cash to handle their cash-flow needs in light of a small crop," Farrell said.
Denny Everson, executive vice president of First Dakota National Bank in Yankton, South Dakota, has been making farm loans for 37 years and says 1988 is very different from 2012.
"We were already dealing with bankruptcies and foreclosures beyond belief," he said, contrasting 1988 with the strong farm finances of 2012. "Having strong working capital going in is going to help us to be ready to fight the storm. It just depends on how long it lasts. That's the big question mark."
CROP INSURANCE MUCH BETTER, DIFFERENT FORMULA
University of Illinois agricultural economist Gary Schnitkey, who advises farmers on planning for costs and returns, said: "Crop insurance will provide better protection in 2012 than in 1988."
According to the U.S. Agriculture Department's Risk Management Agency, in 1988 only 55.8 million acres of corn, soybeans, wheat and other crops were covered by crop insurance. A total of $1.1 billion in indemnities were paid. By contrast, in 2011 a total of 265.4 million acres of U.S. crops were insured with payouts of $10.8 billion.
RMA said total 2012 participation data will not be known until later this year. But farm economists and advisers said they expected that cash-rich farmers insured at least as many grain acres as last year.
Farrell said a key beneficial change in crop insurance has been the shift to price-based payouts on liabilities, instead of just percentage of average production.
"We have a component to determine the fall price for our corn and soybean crops for the insurance, so if the markets continue to go up our coverage goes up with those prices. In 1988 we didn't have that. The price was fixed and the only thing that varied was how poor your crop was," Farrell said, contrasting this to the more flexible insurance available in 2012.
"The guaranteed price in the spring for corn was nationally $5.68 and soybeans $12.55. If the fall price is higher, you can take advantage," Farrell noted.
DOUBLE WHAMMY FOR LIVESTOCK FEEDERS
Crops like fruits and vegetables, which can be supported by irrigation, are expected to see losses mitigated. But farmers who will see the most financial pressure by far are the livestock sector, led by dairy. Corn and soybean meal are two essential animal feeds, and prices for both set record highs on the Chicago Board of Trade last week, with no quick end seen.
"The dairy farm sector has been struggling for the entire year," said John Wilson, senior vice president at Dairy Farmers of America in Kansas City. "The drought is causing severe chaos in the corn and soybean and meal market. It's a double whammy. Farmers were already stressed even with $5 corn where we started the year, and milk prices have generally been depressed."
In 1988 there was no government-backed insurance for livestock and dairy. But for 2012 dairy producers have insured a total of 46 million cwt (hundredweight) of milk production, according to RMA data. Government-backed insurance also is available for sheep, hogs, and feeder cattle, but so far enrollment is limited. Continued...