How Drought Affects the Economy

How Drought Affects the Economy

Abstract

In the summer of 2012, a drought overcame more than half of the United States. The initial impact of a drought is of course, a sudden reduction in the water supply, which in turn immediately impacts agricultural productivity. The most significant economic consequences are the reduced water supply, the limited crop yields and deterioration of pastures and food supply for production of the nation's cattle, swine, poultry and egg supply. Environmental consequences of stagnant waterways, diminished wildlife can affect health and tourism in areas.

Secondary or indirect economic consequences of drought are the impact it has on the supplying sector, financial institutions, trade and public goods, and households. The labor markets, aggregate expenditure, demand and supply are all affected by a drought. The government typically steps in to provide relief to farmers. With those subsidies and crop insurance, farmers have been able to sustain a strong economic holding in spite of the drought. Some of the increased prices due to the low supply and high demand will create profits for unaffected farmers. Droughts can have a direct economic effect to the economy with secondary, "ripple" effects and the overall results can be hard to quantify.

Introduction

In the summer of 2012, the United States experienced one of its worst droughts since 1980s. According to the U.S. Department of Agriculture (USDA, 2012), 80 percent of agricultural land in the United States experienced drought conditions in 2012. Economists caution everyone against attempting to project economic impacts while in the midst of a disaster. Accordingly, while this drought is on going, it is only possible to infer the kinds of economic damages to be expected, but not the magnitude of those losses in economic terms. This essay will examine the potential economic impact a drought can bring.

Public Goods & Choice

Extremely dry weather can lead to crop failure, which reduces supplies, and subsequently increases prices. The drought of 2012 is important to consumers because higher crop prices typically lead to higher prices for groceries.

Meat, poultry, and dairy prices are all expected to rise due to the drought of 2012. Feed, corn, and grass were the most effected, and the impact from their scarcity has been felt at the grocery store: price increases have hit a record high since the beginning of 2013. Since drought conditions forced farmers to reduce the size of their herds to combat higher feed costs, the price of beef and chicken began to rise. The cost of dairy products, have been affected by the drought as fewer and leaner cows produce less milk. Overall, the USDA expects food prices to rise 3.5% to 4% in 2013.

Past experience tells us that the overall economic impacts of drought can be difficult to isolate using standard measures such as gross domestic product (GDP). After the 1988 drought, for example, real gross domestic product (GDP) in some states actually posted real gains and even outpaced the national rate of GDP growth in the year after the drought. Despite any apparent gains in the aggregate economy, there will be strong pockets of loss resulting from the 2012 drought. Many crop and livestock producers will not be made whole, and many businesses and households will experience uncompensated losses. Public sector losses will be difficult to tally and costs may continue to accumulate even after the drought has ended.

Macroeconomics

According to the U.S. Drought Monitory (2013), a moderately severe to exceptional drought is anticipated for 2013. Although agriculture is a small part of the $15.5 trillion U.S. economy, it had been one of the most resilient industries as the country recently struggled to recover from the recession. The drought could become a $50 billion event for the economy according to agriculture economist, Michael Swanson. Record high food prices may advance. Ernie Goss, a professor of economics at Creighton University in Omaha, Nebraska stated that, "The drought will have regional, national and even international impacts" (2013). Farm income, he predicted, will be under "significant downward pressure." Farm equipment vendors, furniture stores, and others have already been seeing farmers pull back. Vendors said typically they are selling planters and tillage, furniture and things, but they were not selling near what they did in the past because people are waiting to see how bad this drought is and were holding off on making purchases in 2012.

The effect of the drought has a trickledown effect. Commodity prices could contribute to unwanted inflation and the resulting prices could have an effect on food retailers, which would face higher meat costs. Cereal and beverage makers incurred elevated corn and sweetener prices.

The agriculture's modest economy may not be that affected from a single season's drought. According to some economists, it may have little lasting impact on the national economy

Banking Industry

The drought of 2012 has been one of the most severe in recent U.S. history. Farmers expected a higher than normal harvest. They took out extra loans from creditors and used more than average resources to plant a very large harvest. By mid-summer, the USDA cut its yield estimates for soybeans and corn significantly and the end of the season showed very poor results. The cattle industry faced feed prices so high that farmers were losing money on cattle despite record high beef