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Drought threatens to drain Rock County's economy

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Catherine W. Idzerda
July 15, 2012

— Commuters driving past fields of spiky and dying corn might wonder if the drought will mean higher food prices next year.

What they probably don't ponder is what a partial or total crop failure would do to the local economy.

In the dark days of the Great Recession, deepened locally by the closure of Janesville's GM plant, Rock County agriculture stayed strong.

"Agriculture was the shining star of our local economy when housing and manufacturing were down," said Rene Johnson, vice president of ag lending at Union Bank and Trust, Evansville.

Grain prices were high, and harvests were big.

Farmers, food processors, farm machinery dealers, large animal vets, vegetable growers, grain exporters and many others helped keep the local economic engine turning.

According to the UW Extension, Rock County agriculture:

-- Accounts for $1.45 billion in business sales.

-- Contributes almost $445 million to county's income.

-- Pays almost $37 million in taxes.

-- Provides 6,266 jobs.

-- Accounts for almost 8 percent of the county's income.

The DeLong Company in Clinton, for example, is one of the leading exporters of food grade soybeans to the Pacific Rim.

But the area's reliance on agriculture cuts the other way, too. If the drought reduces the corn harvest to near zero, the local economy will take a big hit.

Hunkering down

How would a bad year of farming impact farmers and local businesses?

"A good economist always says, 'It depends,'" said Steven Deller professor of agriculture and applied economics at the UW-Madison.

For farmers, it depends on their financial position and what they did during the good years. If they saved money or paid down debt, that's a good thing.

The Rebout family, who farm west of Janesville, used those good years to build equity in their business by building new calf and heifer barns. That's a positive step, too, Deller said.

If the year continues to go badly, both businesses related to agriculture and not related to agriculture will feel it.

It's something economists call the "wealth effect," Deller said.

Before the housing market collapsed, people's primary assets were their homes. They used their homes to take out lines of credit, deducting the interest from their income taxes.

But after the collapse of the housing and stock markets, everybody stopped spending, even people who still had jobs, had paid off their homes or were otherwise in a good economic situation.

"That's the wealth effect," Deller said. "People suddenly feel much poorer than they actually might be."

Farmers faced with a poor harvest likely will respond as business owners, as consumers and as family members, he said.

"As a business person, they're going to hunker down," Deller said. "They're not going to build buildings, they're not going to buy equipment."

As farm families, they'll be careful about spending money. Maybe they'll put off buying a used car for a daughter, or hold off on buying a refrigerator or even decide to skip the movies in favor of an evening at home.

Those decisions will trickle through the local economy.

How bad is it?

To recover, crops would need "perfect growing conditions for the rest of the year," Deller said.

Here's the situation:

-- Average rainfall for Rock County in May and June is 7.8 inches. This year, Janesville had 2.5 inches in those two months. Except for localized trace amounts, there's been no rain in July.

-- A series of days with triple-digit temperatures made a bad situation worse.

-- Cows don't like the heat; it makes them uncomfortable and disinclined to eat. As a result, milk production is down significantly.

-- The corn is curled and spiky across the county. In some places, it's dead. In others, it's starting to tassel. Extreme conditions mean pollination will be poor, and corn cobs will produce very few, very small, or no kernels at all.

-- The corn could be cut for silage, but growing conditions mean it will be high in nitrates. Such silage must be mixed with a large number of purchased additives to make it safe for animals.

-- When temperatures return to normal, milk production won't return to previous levels. In addition, dairy and livestock who lost field crops will have to buy feed—and that's going to be expensive.

"For dairy farmers, it's a double whammy," said Johnson. "A lot of land around here goes to cash grains. If that is lost, what are they going to feed their cows? It's going to be one more heavy load on their back."

Help might come from federal government.

"I understand that Gov. Scott Walker is collecting information for disaster relief from the federal government," Deller said. "We're not quite there yet."

Hope for hail

Doug Rebout joked that a hailstorm might be just what his farms need. That's only because his hail insurance provides better coverage that his crop insurance.

Rebout and his family have 2,600 acres of corn, milk 130 cows, and have about 570 other animals including heifers, calves and steers that they finish.

Their fields look bad. The corn has narrowed into green spikes.

Unfortunately, he's already been paid for about half of a corn crop that's unlikely to materialize.

"What we do is we figure we should have about so many bushels and we usually contract about 50 percent of the crop," Rebout said. "We contracted for this fall's crop about a year and a half ago."

That money pays for inputs such as seed, fuel, fertilizer and other chemicals, machinery costs and some labor.

"We have insurance to cover our input costs," Rebout said.

Unless things get better immediately, the farm will lose money this year—even with the insurance.

"It's part of farming, it's part of the business," Rebout said. "We've had some good years. Now we're just going to have to hunker down."

CROP INSURANCE CAN HELP COVER SOME LOSSES

Even farmers with crop insurance won't have complete protection from drought losses.

Farmers can insure 50 to 85 percent of their yields, said Jessica Sarbacker, crop insurance manager for Union Bank and Trust, Evansville. So, even if they carry the maximum amount of insurance, it wouldn't kick in until losses hit 15 percent of last year's yield.

The most common crop insurance policy usually is 70 or 75 percent coverage, Sarbacker said.

Much depends, too, on commodity prices and the type of insurance farmers carry.

For example, revenue insurance is based on the average of corn contract prices during February. Let's say that number is $5.48 a bushel. That's the minimum price farmers are guaranteed for their losses. However, if the average of the futures price in October is $7 a bushel, farmers will receive that.

Yield protection insurance guarantees farmers only the average contract price set in February.

In 2011, about 4.9 million acres of Wisconsin's farm acres were covered by crop insurance.

That works out to about 69 percent of cornfields and 74 percent of soybeans acreage.

Farm lenders always encourage—and sometimes require—crop insurance. Premiums vary from year to year, but this year a 70 percent crop insurance policy would cost about $15 per acre.

On Tuesday, Union Bank and Trust is holding an informational meeting for their customers to educate them about the best way to file claims, when to contact adjusters and marketing during a drought.

"We've been so lucky for so long," Sarbacker said with a sigh. "We just need to do a little education on the issue."



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