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Why Drought Is Good For The Ag. Business

For farmers, abundant rain is good for crops, and crops are good for business. But it turns out that drought is good for the ag business, too.

The United States saw record drought in 2012, and virtually every news story about it described the impact on American farmers, usually in apocalyptic terms. But no one mentioned the flip side of that drought: record prices for agricultural products and record farm income. Economics 101: when demand is inelastic (as with food), then the increase in price more than outweighs the decrease in supply.

According to the USDA, overall U.S. crop income rose by 4%, from $208.3 billion in 2011 to $216.6 billion in 2012. Even though we lost about 30% of the corn crop, corn sales were $65.8 billion, up 3.1% from $63.9 billion in 2011. Soybeans also did well: up 11.5%, from $37.6 billion to $41.9 billion. Rounding out the top three agricultural products is wheat, where income was up 8.7%, from $14.6 billion to $15.9 billion. Even livestock income rose 3%, from $166 billion to $169 billion, and any drought story that wasn’t about corn was about cattle.

And when you add in the fact that 90% of farmers have (federally subsidized) drought insurance, you can see why drought is good for business. At least agribusiness.