Despite Drought, 2012 Most Profitable for Farmers in 40 Years

Despite the country experiencing the worst drought in at least a quarter of a century, the U.S. Agriculture Department said this season may have been the most profitable for farmers in 40 years.

Net farm income is expected to be $122.2 billion, the highest number since 1973 when adjusted for inflation. Farmers last year profited $117.9 billion, and the average since 2002 is $74 billion.

While expenses are forecast to be higher this year at around $329.1 billion compared with $310.6 billion last year and an average of $248.7 billion since 2002, total gross income is expected to grow by 5.1% year-over-year to $451.4 billion.

The increases come from a combination of things that have together helped offset what has become an arid U.S. crop belt, stunting the growth of widely-used products like corn and soybeans.

Higher crop prices due to a squeezed supply as well as expected payments from the widespread use of government-backed crop insurance are expected to offset the loss experienced by a much lighter yield this season.

On Tuesday, disaster modeler AIR Worldwide said insurance losses from the drought that ravaged U.S. crop production could reach as high as $20 billion.

The USDA is also forecasting a 39% increase to $8.4 billion in what it calls other farm income, which will be driven by large increases in farm-insurance payouts.

By the end of July 2012, the area of the contiguous U.S. affected by severe to extreme drought increased to 42%, ranking this year’s drought as the fifth worst since 1895.

Low crop yields from plants such as corn and soybeans, with yields as low as 40% below normal in some cases, have forced commodity prices higher this year. Since planting this spring, corn prices have skyrocketed by 142% and soybeans by 127%, according to AIR data.

While that says little for the insurers and government-backed programs that will be on the hook for the destruction on U.S. crop fields, for farmers it has been a necessary cushion to help offset expenses.

Led by an expected 6.3% year-over-year increase to $222.1 billion in crop cash receipts, total cash receipts during the 2012 season are expected to reach $387.9 billion, according to the USDA, which is above the average of $271.9 billion since 2002.