When the Rains Stop

Meteorologists call drought the “creeping disaster” because, unlike hurricanes and tornadoes, droughts normally unfold in slow motion, day after dry day. The “flash drought” of 2012, though, is proving to be anything but a slow burn. From the middle of June to the middle of July, drought gobbled up cropland at an alarming rate, pushing the amount of land under severe drought from 17% to 39% of the continental U.S. Bone-dry weather combined with high temperatures–2012 is on track to become the hottest year on record–sucked the moisture from the air and the soil, toasting America’s breadbasket. More than half the continental U.S. is parched–the largest swath of the country that has been this dry since 1956.

Crops are wilting in Corn Belt states like Illinois and Indiana, where some farmers have already given up on a harvest. Only 26% of the corn crop is currently rated good or excellent, according to the U.S. Department of Agriculture (USDA), whereas 45% is rated as poor or very poor. What was expected to be a record harvest–farmers planted more corn this spring than in any year since 1937–is sure to disappoint; the USDA has already cut the projected corn yield by 12%. That’s caused prices to rise, with corn hitting a record $8.24 a bushel on the Chicago commodities exchange. Last year at this time it was less than $7 a bushel.

The torrid weather is hitting at a time when grain stockpiles are unusually low, increasing pressure on prices. If the drought lingers–and weather forecasts offer neither rain nor hope–we can expect to see more-costly food across the board this fall in the U.S. and, even worse, in developing nations where hundreds of millions already go hungry.

We’ve seen this before. Sharp spikes in the price of food in 2007 and 2010 helped lead to riots and may have been one of the sparks for the Arab Spring. It’s no wonder that USDA Secretary Tom Vilsack’s drought response apparently includes appeals to a higher weatherman. “I get on my knees every day,” Vilsack told reporters in Washington recently. “If I had a rain prayer or a rain dance I could do, I would do it.”

The secretary’s rain dance is most needed in the heart of America’s Corn Belt, where the drought is reviving memories of the Dust Bowl in the 1930s. But while farmers are the first victims of drought, a lot has changed since dispossessed Okies fled parched Midwestern farms for California during the Great Depression. For one thing, today’s farmers had been doing pretty well: high crop prices, fed in part by growing incomes in overseas markets like China and by mandates for corn ethanol, helped U.S. farm income reach a record $98.1 billion last year. Farmland in the Midwest was going for some 10 times as much per acre at the start of the 2012 growing season as it was a decade ago. There are fewer farmers now–just 1.2 million in the U.S., compared with 6.8 million in 1935–but they tend to be better off than the average American. While the financial hit from the drought of 2012 will almost certainly eclipse the $78 billion in inflation-adjusted losses recorded during the great drought of 1988, the agricultural sector is in much better shape to absorb the damage.

In fact, some farmers may end up benefiting. Growers in the northern reaches of the Corn Belt have been spared the worst, which means they should be able to take advantage of record prices. But even farmers who have all but given up on their fields won’t go under, thanks to subsidized crop insurance. This year, 85% of all planted acres in the U.S.–up from 75% a decade ago–are covered by some form of crop disaster insurance. If those farmers took out insurance plans with a harvest-price option, they’ll be paid for crops destroyed by drought at the market price–a price, of course, that has increased thanks to that same drought.

Taxpayers can expect to foot a good deal of the bill, because the government now subsidizes much of the cost of private insurance. “Taxpayers are going to be the ones who will come to the rescue of Midwestern farmers,” says Bruce Babcock, an agricultural economist at Iowa State University. “Crop-insurance companies are not going to be able to take on these losses.”

How big will the bill be? Agriculture’s indemnities losses last year reached $10.7 billion thanks to a devastating drought in Texas and the Southwest, so this year’s even drier weather will surely cost more.

While corn farmers smart enough to buy subsidized insurance will weather the weather, everyone else in the food chain will be worse off. First in line are livestock farmers, who will have to buy high-priced corn to feed their animals because pastures have been charred. Hog farmers, who depend on cheap corn, are hurting badly. Some ranchers are selling their cattle early out of desperation; the national cattle inventory is at its lowest level since the USDA began keeping track in 1973. The drought will actually lead to lower beef prices in the short term as a glut of cattle reach markets, but prices will rise as the industry struggles to rebuild itself after two crippling droughts in a row.

The cost of everything from hamburgers to cereals to Gatorade could go higher, since corn is the base of the U.S. food pyramid. For every 50% increase in corn prices–and corn has already jumped by more than half since the spring–retail food prices usually rise by 0.5% to 1%. It will take several months for the full effects to be felt in the processed-and-packaged-food industry, but drought will eventually deliver an unwelcome jolt to the struggling economy as it kicks inflation up a notch.

The drought’s biggest victims may be people who work in the restaurant industry, where more-expensive food will raise operating costs and might discourage potential customers from stopping in if menu prices rise as a result. There’s no subsidized insurance program for servers laid off because of the weather.

Still, Americans are comparatively well insulated from the increase in crop prices, largely because our diets are so full of processed goods that only about 15 of every dollar we spend on food actually goes to food. (Most of the remainder goes to packaging and advertising.)

That’s not the case in developing nations, where hundreds of millions live on plain tortillas or bread and the cost of commodities really is the cost of food. A reduction in the American harvest translates to higher prices overseas. Global food prices have slowly but steadily increased since 2004, with sharp spikes in 2007 and 2010. It’s likely not a coincidence that social unrest in places like Latin America and the Middle East followed those spikes. Global stocks of corn and soybeans were tight even before the drought. “We’re on the verge of another crisis, the third one in five years, and likely to be the worst yet,” says Yaneer Bar-Yam, a researcher at the New England Complex Systems Institute and the co-author of a new paper on the 2012 drought.

Much depends on whether the drought of 2012 really is just a flash. Though some much needed rain fell on the Midwest toward the end of July, forecasters are predicting that the drought will last until at least October, if not longer. And then there are the years beyond. While climate change has had an uncertain effect on this year’s drought–blame La Nia, the periodic ocean cooling that can wreak havoc with weather–there’s general agreement that dry conditions will become ever more common in the Midwest as the world warms. The creeping disaster could be here to stay.