Why the Worst Drought in 50 Years Won't Bankrupt American Farmers

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If you've been worried that this year's drought will put farmers out of business and leave Americans short of the staple crops they need to survive, relax. In its latest farm income forecast, the Department of Agriculture is reporting that U.S. farmers will make more money in 2012 than ever before, even as the country is facing its worst drought in 50 years.

How is this possible? Rising prices, for one. The U.S. is the world's biggest exporter of corn and soybeans. As the summer's extreme heat has baked the Plains and the Corn Belt, prices have naturally gone up at home and around the globe. This will help make up for the crops that farmers have had to abandon in the fields.

"With corn and soybean supplies for the 2012 marketing year expected to be the lowest in 9 years," the USDA said in its statement, "prices are increasing dramatically, resulting in higher expected 2012 calendar-year receipts for many crops."

Insurance Companies to the Rescue

Crop insurance is the other silver lining for farmers in what would otherwise be a very dark cloud, and a very dark fiscal year. Farming is beholden to the weather and other vagaries of nature, like crop-destroying pests and diseases, to a degree not experienced by any other industry. Also unlike any other industry, the lives of people around the world depend on American farmers staying solvent through these vagaries.

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That's why farmers avail themselves of crop insurance, which does exactly what you think it does: protects them against loss of income from devastating acts of nature. According to Financial Times, agricultural economists from the University of Illinois predict that this year's drought will trigger crop insurance claims of nearly $30 billion.

One insurance analyst told Financial Times that the drought of 2012 is a "catastrophic event," and that it is "likely the largest [insurance] crop loss in history." The National Oceanic and Atmospheric Administration is reporting that the drought has hit 85% of America's soybean crop and 87% of the country's corn crop.

But Who Rescues the Rescuers?

So if we don't need to be worried about farmers, should we be worried about insurance companies and their ability to handle this unprecedented mountain of claims? After all, without companies willing to insure crops, it will only take one more catastrophic event to truly wipe U.S. farmers out.

As you might have already guessed, whether it's with too-big-to-fail banks or too-big-to-fail commodities, the federal government is the entity insuring the insurers. Of the $18 billion underwriting loss that will result from the $30 billion in crop claims, Uncle Sam will step in to cover $14 billion of it.

But while 2012 U.S. farm income is expected to exceed $122 billion, cash income is expected to exceed $139 billion, and farm equity is expected to increase to an all-time high of nearly $2.3 trillion, don't expect to see American farmers tooling around their fields in the latest luxury SUV or soaking up the sun in the south of France anytime soon. Federally backstopped crop insurance won't make them rich, but it will allow them to do what they've always done: feed the world, year after year, no matter what nature throws at them. Those are your tax dollars at work, but given what's at stake, it's hard to argue they're not dollars well spent.



John Grgurich is a regular contributor to The Motley Fool.
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