Economic Impacts of the 2007 Drought
|By Ya Ding, Agricultural Economist, and Kelly Helm Smith, Science Communicator, with contributions from Brian Fuchs, Climatologist, National Drought Mitigation Center
A multi-year drought receded in the Midwest in 2007, but the Southeast endured a second very intense year of drought, and drought hit Southern California hard, contributing to widespread wildfires as well as agricultural losses.
A dry spell that started in the Southeast 18 to 24 months ago turned into a scorching drought during the spring and summer growing season. As of mid-December, many locations were on track to set all-time records for least precipitation recorded in a year. Heat was also an important factor in the drought. Many weather stations will record 2007 as one of the 10 hottest years on record. As of year-end, large areas of Alabama, Georgia and Tennessee were rated D4 (exceptional drought) on the U.S. Drought Monitor map, indicating the highest level of drought severity, and the Carolinas were almost completely in D3 (severe drought) or D4. The impacts of the drought were devastating, not only damaging agricultural production, but also depressing local businesses and industries such as landscaping, recreation and tourism, and public utilities. Residential water use has been restricted as well. Many drought-stricken areas have imposed voluntary and mandatory bans on outdoor water use and requested voluntary indoor water conservation. With the La Niña in full force and not expected to go away until late spring or early summer, the conditions in the Southeast are not expected to improve during the winter months, and could actually worsen in many locations, such as Florida and Georgia.
One of the challenges in reporting drought’s economic impacts is that economic data tend to be aggregated into state and national summaries that don’t reflect the extreme hardship faced by individual agricultural producers. Drought is one of many factors that influence prices on the global commodity market.
The good news is that farmers in major grain-producing states are expecting the highest cash receipts ever from their 2007 crops, given record-high grain prices and near-record production. The boom of corn-based ethanol production has boosted the price of corn since 2006. Additionally, Australian drought in 2006 led to a shortage of wheat in the international market, which drove grain prices up further. Figure 1 plots the monthly prices of corn and wheat in the United States. The national average price of corn was up 20 percent and wheat, 70 percent, from the preceding year, as of November. In the drought-stricken Southeast states, grain prices rose even higher. The November corn price was higher than the national average by 11 percent in North Carolinaand by 10 percent in Tennessee. Although higher prices helped offset part of the yield loss, many local farmers still faced significant economic losses. The average corn yield was down from last year by 32 percent in North Carolina and by 15 percent in Tennessee. Drought also caused damages to other field crops such as soybeans, cotton, and hay. Comparing preliminary data for 2007 with historic averages, the National Drought Mitigation Center estimates that losses to major field crops, including corn, wheat, soybeans, cotton, and hay, totaled more than $1.3 billion for the Southeast. The region included in the estimate covers Alabama, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia. These data are from the National Agricultural Statistics Service (NASS) of the U.S. Department of Agriculture.
Citrus crops have also been affected by the drought. Florida and California are the nation’s top two citrus states, accounting respective for 70 percent and 25 percent of the 10.3-million-ton U.S. citrus production in 2007, according to NASS reports. California’s deep freeze early this year and the ongoing drought in southern California and Florida reduced the 2006-2007 citrus crop yield by 13 percent, compared with the previous season. Florida’s orange production was down 13 percent and California’s was down 26 percent from the last season. Accordingly, the price of fresh oranges was up 40 percent in California and 90 percent in Florida. Higher prices helped offset yield losses. The value of the national crop came to $2.95 billion, up 8 percent from the previous season.
The cattle industry was stressed during the drought because of the shortage of feed. To take advantage of high crop prices, farmers have planted more acres in corn and wheat, but less in hay and other feed crops, which led to a hay shortage. Making matters worse, the heat and dry spell in drought-affected areas withered pastures and rangelands, causing poor grass growth. According to a USDA crop progress report on October 28, 93 percent of pastures in California were rated in poor to very poor condition, as were 57 percent in Georgia, 86 percent in North Carolina and 63 percent in Kentucky. Nationwide, 32 percent of pastures were rated in poor to very poor condition. Poor pasture conditions forced producers to pay high prices for supplement feed. The increasing demand intensified the hay shortage, leading to soaring hay prices. Figure 2 plots the monthly hay prices from January 2006 to November 2007. The November U.S. average hay price was up over 20 percent from the previous year.
Farmers who could not afford expensive feed were forced to sell off part of their herd. Losses were incurred as cattle were put onto the market before they reached the most profitable weight. Meanwhile, a large number of cattle liquidated onto the market also reduced the cattle price in drought areas. Cheap cattle prices benefited cattle buyers outside the drought areas. In June and July, northern Alabama had the dubious distinction of being the epicenter of drought in the Southeast. Southeast Farm Press reported July 4, “Many in Alabama have begun selling off cattle for fear they won’t have enough hay or grain to feed them through the summer and through next winter. State livestock auctions are seeing a more-than-60-percent increase in the number of cows or calves sold at auctions. In the exceptional drought area, increases are more than 100 percent. With ponds and streams drying up, some farmers have had to buy water for their cattle to drink, and a cow can drink about 30 gallons a day.”
Cattle producers in the Southeast now face challenges finding enough feed for their herds for the winter, according to Curt Lacy, a livestock economist with the University of Georgia College of Agricultural and Environmental Sciences. “It’s a very precarious situation right now,” he said in an October 11 press release. “I don’t see how we will not have to liquidate cows due to the lack of hay supplies we have in the state going into this winter.” He estimated the 2007 hay harvest would be 600,000 to 1 million tons of hay, compared with the 2 million tons that is possible in a good year, and that cattle producers would end up reducing beef cow herds by 5 to 10 percent.
Nursery Crops and Landscape Services
Nursery and landscape businesses were facing big losses from drought. Nursery crops are normally one of the largest agricultural commodities by gross value of sales in California and many Southeast states. Out of the national gross sales of $4.65 billion in 2006, California and Southeast states made up over 60 percent. In 2007, drought prevented the growth of new plants and damaged perennials. Given this year’s drought conditions in California and the Southeast, we anticipate significant reductions of output and sales of nursery crops, although the USDA has not yet released 2007 figures for this industry. Landscaping businesses had a harsh year. Plant sales were down, plant mortality increased, and watering costs increased. Many businesses were forced to close locations, lay off employees, and even file for bankruptcy. The Georgia-based retailer, Pike Nursery, filed for bankruptcy protection due to drought. As the drought is still going on, the effects may not yet be over. Municipal restrictions on outdoor watering also play a significant role in this industry.
Recreation and Tourism
Lakeside recreational businesses were badly hit by the drought, with reservoir levels greatly reduced. Recreation was forced to take a back seat to other competing needs such as irrigation, hydropower generation, residential water use, and environmental water needs. During the drought, many boat docks and lake beaches were forced to close, leading to big losses for lakeside business owners and local communities. Although there are many examples of businesses that have suffered due to drought, dollar figures for drought-related losses to the recreation and tourism industry are not readily available. The federal government is currently providing low-interest (4 percent) loans to small businesses through the U.S. Small Business Administration, which might help some recreational businesses recover.
The exceptional drought in the Southeast affected hydropower generation. Dropping lake levels forced power companies such as the Tennessee Valley Authority (TVA), Duke Energy and others to reduce electricity generation from cheap hydropower, to substitute electricity generated from more expensive fossil fuels, and to pass costs along to consumers. A November 29 TVA press release reported that TVA’s hydropower generation was 24 percent below normal for fiscal year 2006, 31 percent below normal in FY 2007, and 66 percent below normal for the fiscal year that began October 1. The TVA attributed the decrease to 33 percent below-normal runoff reaching reservoirs in 2007 and 46 percent below-normal runoff in 2007. An August 27 Duke Energy press release said hydroelectric power generation was down 45 percent for April-June of 2007 compared with the previous seven years.
Residential Water Use
The water shortage in the Southeast was so serious at the end of the year that some cities including metro Atlanta were in danger of running out of water within a few months. Private and municipal wells have gone dry and many locations are continuing to watch municipal water supplies dwindle. This water emergency has triggered the highest level of water restrictions specified by plans in many drought-stricken areas, limiting both commercial and home water use. Drought’s effects were no longer limited to the agriculture sector or rural areas, but instead, were felt by normally well-protected urban residents in their daily lives. Urban and rural areas were pitted against one another, and municipalities and states pointed fingers at one another and at the U.S. Army Corps of Engineers, accusing each another of not doing enough to conserve, and of having misplaced priorities. Accordingly, the media coverage of drought reached a peak of intensity. The Valdosta (GA) Daily Times said in a widely circulated editorial: “[Atlanta] politicians can’t bring themselves to tell their greedy constituents complaining about the low flows in their toilets this week that perhaps if they didn’t have six bathrooms, it might ease the situation a bit. That watering your lawn isn’t as important as watering crops. Or that their greedy overbuilding has taxed their supplies of natural resources beyond their capabilities.”
In 2007, drought’s impacts went well beyond agriculture, even in the Southeast, which people normally think has plenty of water. The intense drought in a densely populated part of the country can and should bring about permanent changes in the way we handle drought. It raised questions about the long-term sustainability of current development patterns. The need to address the likelihood of water shortages in the future through policy, legislation and drought planning is currently difficult to avoid. We hope that decision-makers at all levels will keep these questions in the forefront until they have been addressed.
© 2008 National Drought Mitigation Center