Will the 2012 U.S. Drought Burst the Farmland Property Bubble?

August 1, 2012 | 11:00 am
Doug Boucher
Former Contributor

The Midwest drought continues to intensify. As you can see in this animation of how the 2012 drought has spread and deepened over the past 12 weeks, we’re witnessing a major climate impact on our agricultural system that is leading to record corn and soybean prices, among other significant and costly consequences. Lately I’ve started considering the potential long-run impact of this drought on the region and on the entire structure of U.S. agriculture.

Drought in AmericaThis is part of a series on the 2012 Drought in America.

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The USDA’s Economic Research Service reports that “about 2/3 of all crops and 2/3 of all livestock are produced in areas that are experiencing at least moderate drought,” and that “44 percent of cattle production, and almost 40 percent of corn and soybean production, are in areas experiencing at least severe drought.”

But those increases in food prices, particularly for the corn and soybeans of the American Midwest, are not just due to the need for people to have something to eat. As the graph below shows, most U.S. corn goes either to produce ethanol (about 40%) or to feed livestock (about the same). The soy is almost all used as livestock feed too.

Increased use of corn for biofuels in the last decade.

Ethanol and livestock feed are now the predominant uses for U.S. corn. Graph: Jeremy Martin, UCS, using data from the USDA Feed Grains database. http://www.ucsusa.org/assets/documents/clean_energy/ew3/corn-ethanol-and-water-quality.pdf

Legislation passed by Congress effectively subsidizes these uses by a variety of mechanisms. Among them are the mandate for 13.2 billion gallons of corn ethanol in the 2007 energy bill, and crop insurance in the Farm Bill, which compensates corn and soy producers for losses due to drought. A forthcoming post from my UCS colleague Karen Perry Stillerman will explore the various ways the next five-year Farm Bill—now caught up in election-year politics in Washington—could help farmers (and taxpayers) better cope with future droughts.

For many years, we have seen farmland prices rising, and the increase in the Midwest in the past year has been dramatic, with several states seeing more than 20 percent or even 30 percent increases in a single year.

While the general trend of farmland values is upwards over the past half-century, the increase in the 21st century has been particularly rapid.

Farm prices have increased by over 20 or even 30% in some Midwestern states in 2011. Source: Federal Reserve Bank of Kansas City, 2012.

It’s conventional economic wisdom that government policies that have subsidized the production of certain crops and boosted their demand have been a significant factor in soaring land values. If a large number of farmers get their crops wiped out by the drought and default on their loans – and the prospect of future droughts in a warming world finally comes to be seen as a threat to future productivity – does that mean that the bubble will burst?

To find out about these questions, I talked to my colleague in the UCS Food and Environment Program, agricultural economist Jeff O’Hara. Jeff told me that last year the prominent Yale economist Robert Shiller had pointed to the farmland market as the next potential bubble. We already know that corn and soybean monocultures pose environmental risks.  However, having only a handful of crops dominating regions like the Midwest implies that our agricultural system is highly vulnerable to economic risks as well! Just like a retirement fund should have a number of assets to protect against risk, so should individual farms and the landscape broadly speaking.

The high prices mean that the lucky farmers that were not impacted by the drought will do extremely well.  What happens to the farmers who suffered damage?

As Jeff discusses in his new report, Ensuring the Harvest, the federal crop insurance program supports corn and soy – and thus, biofuel and meat production – and these farmers tend to be generally wealthier and have more acreage.

Farms that are actually attempting to mitigate risk on their own – for example, a Community Supported Agriculture farmer growing a variety of fruits and vegetables throughout the growing season – have no effective insurance policies.  Now that such weather events will be happening with greater frequency, we need an agricultural system that is far more resilient.

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So, just like investment banks, our government has deemed certain farms “too big to fail.”  If the Midwest drought and heat wave continues as NOAA is forecasting, you and I and all the other American taxpayers will pay for it twice – in increased meat and milk prices over the next few months, and next April 15 when we file our 1040s.

Sound like a system that is in danger of collapsing, leaving taxpayers to foot the bill? Now, when have we seen that before?