First Pioneer Farm Credit: Notebook: In The News

Disruption of Agricultural Production, Processing and Distribution by Hurricanes in Gulf Coast Region

Gulf Coast hurricanes Katrina and Rita affected the costal areas of Alabama, Mississippi, Louisiana, Texas and the southern tip and panhandle of Florida. Katrina came ashore on August 29 and Rita came ashore on September 24. The official death toll stands at just over 1,200 for Katrina and 120 from Rita and damage estimates range up to $200 billion². This paper examines the direct impact of these hurricanes on agricultural production, processing, and distribution.

The affect of the hurricanes on United States agricultural production is modest. Wind damage occurred along the coast, but many areas from Tennessee to the Northeast and parts of the Midwest benefited from the much-needed rainfall. While some producers in the directly affected areas may have experienced severe damage, the affect on total US production is small. The following information is primarily from USDA Crop Production reports. The September report included the effects of Katrina and the October report included the effects of Rita³.

Corn: USDA production estimates increased over prior month estimates in both September and October. Higher yields in other states more than offset declines in Alabama and Mississippi. The USDA expects the second largest crop on record (10.9 billion bushels compared to 11.8 billion bushels in 2004).

Soybeans: USDA production estimates increased over prior month estimates in both September and October. The USDA expects the second largest crop on record (2.97 billion bushels compared to 3.12 billion bushels in 2004).

Cotton: USDA production estimates increased over prior month estimates in both September and October. The USDA expects second largest crop on record (22.7 million bales compared to 23.3 million bales in 2004).

Sorghum: Yield estimates improved or remained constant between August 1 and September and improved between September 1 and October 1 in each of the three affected states that are major producers (Alabama, Louisiana and Texas).

Rice: Before the hurricanes, rice harvest was 63 and 71 percent complete in Louisiana and Texas, respectively. Minimal damage was experienced in Louisiana from Katrina. There was considerable lodged rice in Mississippi, which reduced yields. However, between August 1 and September 1, rice yields estimates were increased by 1 percent. As of October, yields for the US were estimated to be 6,678 pounds per acre, down 2 percent from September and down 3 percent from last year’s record high.

Sugarcane: In Louisiana, where Hurricane Rita caused extensive wind and flood damage to the southwestern sugarcane-growing areas, the production forecast is down 910,000 tons on October 1 compared to September 1. However, increased rainfall in Florida increased production estimates by 990,000 tons, more than offsetting the Louisiana decline. Total sugarcane production is expected to be about 4 percent above 2004.

Pecans: Louisiana and Mississippi experienced extensive damage to trees and will have sharply reduced yields. Louisiana is expected to be down 56 percent from 2004 and 80 percent below 2003. However, increased yields in other areas are expected to result in production that is 50 percent above 2004 and 7 percent below 2003.

Gulf Coast hurricanes had less affect on agricultural crop production than other factors that influence yields and harvested acreages. The only long run effects appear to be the loss of pecan trees in Louisiana and Mississippi. Thus, the affect of production changes, per se, on Northeast agriculture, is negligible.

Dairy Farmers of America estimated the direct losses to dairy farmers from Katrina at $40 million. USDA estimated that the direct losses from dumped milk by farmers and processors at $3 million⁴. Total 2004 milk production was about 171 billion pounds valued at about $16.13 per hundredweight for a total value of about $27 billion, or $74 million per day⁵. The $3 million lost was about 4 percent of one day’s production for the US.

Hurricane Katrina’s overall impact on U.S. broiler production is expected to be relatively small, although damage in specific areas has been heavy. Growers experienced damage to growout houses, loss of electrical power and initial scarcity of fuel for backup generators. Processors experienced power outages and transportation problems. Destruction of key gulf coast ports forced temporary redirection of exports⁶.

Most of the damage to the cattle industry is to barns and fences⁷. Direct losses of livestock due to Katrina appear to be minimal⁸. Keith Collins of USDA reported that there might have been losses of 15,000 head of cattle. This is a negligible proportion of the 96 million head of cattle and calves in the U.S^9.

In summary, while individual farms in the gulf cost region experienced severe damage to their businesses, the effect on total US production of agricultural commodities is generally negligible.

Anecdotal accounts of damage to sugar cane and poultry processing facilities are numerous. In most cases, the damage was short run in nature and the facilities are up and running by now. There is no evidence that the damage to processors will have any significant affect on agricultural prices or product availability in the Northeast.

“Katrina damaged and destroyed port facilities, moved navigation aids and sank barges, disrupting the flow of a wide variety of agricultural products to Gulf ports. Over one-half of all grain exports move out of Gulf Coast ports” ¹⁰. As of September 7 the elevators and floating rigs that store and load grain for export were operating at 63 percent of capacity.¹¹ According to the Department of Transportation web site¹², all ports in the Gulf Coast are now operational, but many are still operating at less than full capacity as of October 19. Full recovery will likely take months, but the degree of restriction is likely having only a very small effect on grain prices.

Rail service in the Gulf Coast region has largely returned to normal. Both railroads and auto roads right along the coast near and east (through Biloxi) of New Orleans are still closed, but most roads and railroads are open throughout the rest of the region. Total rail freight in the U.S. was up 2.5 percent in September compared to last year¹³.

The number of displaced persons is difficult to estimate. One source estimates the number of evacuees from Katrina alone at nearly one half million people¹⁴. As of October 19, the American Red Cross estimated that there were about 200,000 people being housed in hotels and motels nationwide. However, many of these people are expected to return to their hometowns. In surveys of people who were evacuated from affected areas into other states 45-50 percent of the evacuees expressed an unwillingness to return. Mayor Nagin of New Orleans recently admitted that he expected that even after several years of rebuilding, the City of New Orleans would likely only be about half the pre-Katrina size of 560,000. About 40 percent of Katrina evacuees to Texas indicated that they intended to stay in Texas. Another 15 percent indicated that they would probably relocate to other areas of the country instead of returning to Louisiana. Thousands of the evacuees and other citizens from Louisiana have started to migrate not only to the evacuation areas such as Texas, Georgia, and Arkansas, but to other areas including Tennessee, California and the Carolinas¹⁵.

While a few people may migrate to the Northeast, the number is likely to be only a trickle that will have little noticeable affect on the Northeast. There are several reasons for this. The most important is likely distance. In addition to a very different and much colder climate, the Northeast is a long ways, about 1500 miles, from New Orleans. Likewise, the societal culture of the Northeast is considerably different from that in the South and may make it an unattractive location for displaced people. A large part of the population that was hardest hit worked at less skilled jobs and will want to move to areas where there are more jobs that fit their skill set. During the last several years, the Northeast has seen an exodus of those types of jobs to other areas of the country.

As indicated above, all ports in the Gulf Coast area are now open and operational, though some at limited capacity. Anecdotal reports indicate that there is more grain piled on the ground in the Midwest than has been observed in many years. This is the result of having the second largest crop on record (in 2005) following the largest crop on record (in 2004), and likely some effects of the restricted barge travel and limited operation of some ports. The importance of each is difficult to determine. It is expected that the ports will gradually come into full operation during the next few months.

The result of all of these factors is that the current (Fall 2005) price of corn is quite low. Midwest farm level prices are in the $1.80 per bushel range. Chicago Board of Trade prices for October 20 list December Corn at $2.02 with higher prices as 2006 progresses, up to about $2.23 by May and $2.47 by December. Soybean prices follow a similar pattern.

With low current prices and expected significant increases expected over the next few months, Northeast livestock farms with storage may find it advantageous to purchase needed supplies now. Grain farmers will likely find it advantageous to store grains.

At the time of hurricane Rita, over half of the gulf coast refinery capacity continued to be shut down (from Katrina). However the oil industry escaped essentially unscathed from Rita and post-storm predictions estimated only minor price rises. Refinery shutdowns¹⁴ in the Gulf of Mexico region total approximately 1.27 million bbl/d as of October 19, 2005. Refineries have been restarting many of their shuttered units, with only 5% of total U.S. refining capacity expected to be offline as of November 1. Sixteen natural gas processing plants in Louisiana and Texas, with capacities equal to or greater than 100 million cubic feet per day, are not active. These plants have an aggregate capacity of 9.71 billion cubic feet per day (Bcf/d), and they had a total pre-hurricane flow volume of 5.45 Bcf/d¹⁶. However, the major factors influencing current oil product prices is basic supply and demand. World wide demand has exceeded supply, forcing rises in prices and leaving little slack in the system to absorb supply shocks. In addition, the hurricanes added to the considerable uncertainty in the marketplace caused by the tensions in the Persian Gulf. Hurricane damage to refineries has slightly reduced supply, leading to further increases in prices.

The higher prices for gasoline and other petroleum products appear to be influencing demand. The Energy Information Agency of the Department of Energy indicates that demand for petroleum products is down by 1.4 to 3.2 percent from last year depending on the exact comparison made. In addition, Gulf Coast refinery production continues to recover. Since the hurricanes 805 million cubic feet per day (MMcf/d) of onshore and offshore (in State waters only) natural gas production had been restored by October 20, which is 36 percent of total production before the hurricanes¹⁷. Total commercial petroleum inventories jumped by 6.3 million barrels in the week prior to October 20, and remain in the upper half of the average range for this time of year. As of the week ending October 19, the U.S. average retail price for regular gasoline decreased by 12.3 cents to 272.5 cents per gallon, falling for the second week in a row. This week's price is 69.0 cents higher than this time last year. Prices were down throughout the country, with the Midwest seeing the largest regional decrease of 16.6 cents to 259.4 cents per gallon, the lowest regional price in the country. East Coast prices fell by 11.7 cents to 276.6 cents per gallon. The West Coast averaged 287.2 cents per gallon, the highest regional average price in the country, after falling 6.0 cents¹⁸.

It appears that energy prices have achieved their peak and are starting to trend downward. The real question is how far they may fall. It seems highly unlikely that the price of regular unleaded gasoline will go as low as $2 per gallon. A leveling off in the $2.25 to $2.50 range seems more likely.

Current heating oil prices are about 27 percent above year ago levels. On the other hand natural gas prices are about 90 percent above year earlier levels¹⁹. The average cost of diesel fuel in September was $2.82, an all-time monthly high, even after adjusting for inflation, and October is likely to be even higher²⁰. While these prices are likely to decline somewhat over late 2005 and early 2006, the amount of decline could be modest, particularly for heating oil.

In the long run energy prices are likely to continue to be considered “high” by most users. Worldwide energy demand, particularly by countries such as China and India, in addition to the U.S. continues strong. Oil production is near capacity and new major oil fields are few and far between and often contain oil that is more difficult to extract or refine, or is in environmentally sensitive areas.

According to the Fertilizer Institute²¹ (not a totally unbiased source) a major factor influencing fertilizer prices has been increased worldwide demand. Since 2001 total fertilizer demand has increased 13 percent, with N demand up 10 percent, phosphate up 13 percent and potash up 25 percent.

Supply and cost of production of N has also influenced prices. 70 to 90 percent of the cost of N production is the cost of natural gas. As U.S. natural gas prices have increased over the past four years, domestic production of Ammonia has declined by over 30 percent and imports of N have increased. Imports of N have increased to about 45 percent of domestic use from less than 15 percent in 2000. World level prices of ammonia have increased by about 21 percent from mid October 2004 to mid October 2005²².

Assuming that 70 percent of the farm level price of fertilizer is represented by natural gas costs, the 90 percent increase in natural gas prices during the last year would result in over a 60 percent increase in the price of nitrogen fertilizer. This amount of an increase is much more than the increase in world wide N prices. Thus, declining U.S. production of ammonia can be expected and the actual price that farmers will pay will be dependent upon the amount that can physically be imported and changes in world prices. World prices will increase as worldwide energy prices work themselves through production and delivery costs. Physical importation may be limited by hurricane damage to gulf coast ports through which much of the imports flow. Nitrogen prices that are 30 to 50 percent above year earlier levels appear likely.

Phosphate production begins with the mining of phosphate rock. The United States is the largest producer and exporter of phosphate fertilizer. Potash is also mined. Canada is the world’s largest producer. Nearly one half of Canadian exports come to the U.S., which is the largest potash importer. Increased energy costs for mining and processing will increase costs for both of these nutrients. Expanding world demand will also put upward pressure on prices. However, the increase should be small compared to the increase in the price of nitrogen – maybe in the 10 to 15 percent range.

Many pesticides are petroleum based. Higher petroleum prices will undoubtedly result in higher pesticide prices. However, since they are generally oil, rather than natural gas based, and petroleum is a smaller part of the total costs, the increase in pesticide prices will be less – maybe in the 10 to 15 percent range.

The CPI (Consumer Price Index) increased by 1.2 percent in September (the fastest acceleration in 25 years). Ninety percent of the increase was due to a 12% increase in energy prices. However, core inflation, excluding energy and food, increased only 0.1%²³. The relatively low core inflation is sometimes cited as showing that the increased energy prices are not influencing other prices. However, it will take some time (a few months) for the increased energy prices to work their way through production costs and ultimately product prices. The Producer Price Index increased by 1.9 percent in September, indicating that the process has already started²⁴. The increased energy prices can be expected to put upward pressure on prices over the coming months. Most of the upward pressure on energy prices is the result of worldwide demand for oil, with only a small “kick” from Katrina and Rita. Thus, recovery from the hurricane damage will only result in a small “kick” in the downward direction.

Another sector that could provide upward pressure on prices is building supplies. Building supply prices shot up after hurricane Katrina and the rebuilding effort following Katrina, Rita and Wilma will certainly consume large quantities of building materials. Although the housing industry may be losing a little of its steam, it is still building at a very rapid pace. The housing market does not appear to be retreating fast enough to significantly reduce building product demand. As a result building material prices are likely to be increasing.

The Federal Reserve Board’s October “beige book” report (October 19) on current economic conditions indicated signs of moderate economic growth²⁵. There are two sides to this. On the one hand, the economy continued to grow through the two hurricanes (Katrina and Rita), indicating a fairly strong economy. On the other hand, the economy is not growing at such a fast rate that the FED will feel the need to rapidly raise rates to put on the breaks in an effort to control inflation caused by an “overheated”economy.

Some forecasters indicated that Katrina and Rita could reduce total economic growth in the last half of 2005 by as much as 1%. More realistic estimates are likely in the 0.5% range. The affect on 2006 is quite uncertain. The rebuilding effort will be a major stimulus to the economy, particularly if anything like the $200 billion expenditure the President Bush has talked about is spent. On the other side the energy price spike will slow growth through higher production costs, a reduction in consumer confidence and higher interest rates.

The unemployment rate in the U.S. increased from 4.9% to 5.1 percent from August to September. The 5.1 percent report for September was 0.3 percent below the year earlier level. Economic forecasters believe the equilibrium (natural) rate of unemployment is about 5%²⁶. States reporting the highest unemployment were Louisiana and Mississippi, which were most affected by the hurricanes. They reported rates of 11.5 and 9.6 percent, respectively. Those two states had job losses of about 310,000. However, net job losses for the nation as a whole were only 35,000²⁷.

The hurricanes (Katrina, Rita, Wilma) will undoubtedly contribute to an already staggering budget deficit. The Bush administration has thrown around numbers like $200 Billion for recovery from Katrina alone. Rita and Wilma will increase spending. Over $62 Billion has already been allocated. This spending contributes to an already large budget deficit resulting from the Iraq war, anti-terrorism efforts and big tax cuts. Thus, hurricane expenditures will be 100% deficit spending. With the national debt exceeding $8 trillion, some in Congress will likely give a nod to conservatives and make half-hearted attempts to cut spending, but congress finds it difficult to cut spending. One congressman’s “budget fat, spending loophole or government waste” is another’s favorite, and much needed, program. Current discussions are for a $35 Billion cut in health and other social programs over five years. Any pressures on the budget will likely be felt in agriculture as the new farm bill is debated and crafted. One should expect that the outlays for farm programs will decline. This will likely slow the rate of land price increases experienced in the parts of the country most reliant on farm program payments. The budget deficit for the 12 months ending September 30 (referred to as the 2005 year) was $319 Billion. As interest rates increase, the cost of funding the national debt increases proportionately.

The large budget deficit has to put upward pressure on interest rates. The government is greatly increasing the supply of bonds as it finances the deficit. This increase in supply means that higher interest rates will need to be paid to sell the bonds. Fortunately, the Chinese, Japanese and others have had a large appetite for U.S. debt at relatively modest interest rates, so the upward pressure on rates from debt financing has been much smaller than it could have been.

Interest rates can be expected to increase. As higher energy prices work their way through the economy and the rebuilding effort in the Gulf Coast gets underway, upward pressure on inflation rates can be expected. Although the Federal Reserve has increased interest rates considerably during the last several months, rates are only starting to move into the neutral range. To head off inflation and move rates to the “economy tightening” side of neutral, rates will need to be increased by another 1 to 2 percent. Most forecasters expect some further flattening of the yield curve, but that long-term rates will also start to increase modestly over the next 12 months²⁸. Combined with the likelihood of reduced government support, higher interest rates should cause prices in the capital asset markets to increase less rapidly.

Expect little change with Ben Bernanke as chair of the Board of Governors. Major changes from the Greenspan approach would be viewed as “tampering with success.” He is the “new man on the block” and there are six other governors. Bernanke is a proponent of “inflation targeting” which is not a big change from the Greenspan approach.

¹W. I. Myers Professor of Agricultural Finance, Emeritus, Department of Applied Economics and Management, Cornell University. Brent Gloy, Associate Professor, Department of Applied Economics and Managements contributed helpful comments and ideas for this paper.

²Wikipedia.org

³USDA, NASS, Crop Production, September 12, 2005 and October 12, 2005. The entire section on crop yield estimates comes from this source.

⁴Dairy reporter.com article by Chris Mercer

⁵NASS, USDA Milk Production, September 2005 and NASS, USDA, Agricultural Prices 2004 Annual Summary, July 2005.

⁶USDA, ERS LDP-M-135, Livestock, Dairy and Poultry Outlook, Sept. 16, 2005.

⁷Mike Keene, Mississippi Extension Cattle specialist, as reported by David Bennett of the Delta Farm Press.

⁸Derrell Peel, Oklahoma State Extension Livestock Marketing Specialist as reported by Leland McDaniel in Ag News and Reviews. September 18, 2005.

⁹NASS, USDA, Agricultural Statistics

¹⁰USDA/OCE, A preliminary Assessment of the Effects of Katrina and Drought on U.S. Agriculture, September 19,2005

¹¹USDA news release September 7, 2005.

¹²Dot.gov

¹³Rail News@Railserve.com

¹⁴Wikipedia.com, Katrina 10/05/05

¹⁵The Wall Street Journal October 20, 2005

¹⁶Energy Information Agency Daily Report, October 20, 2005.

¹⁷eia.doe.gov

¹⁸Energy Information Agency Daily Report, October 20, 2005

¹⁹Energy Information Agency Daily Report, October 20, 2005

²⁰USDA/OCE A Preliminary Assessment of the Effects of Hurricane Rita on U.S. Agriculture, October 18, 2005.

²¹The Fertilizer Institute, Perspective on Fertilizer Prices

²²Yara.com, Fertilizer Prices

²³Wall Street Journal, October 14, 2005.

²⁴Bureau of Labor Statistics web site.

²⁵The Wall Street Journal, October 20, 2005 p. C1.

²⁶Philadelphia Federal Reserve Bank survey of professional forecasters.

²⁷US Department of Labor, Bureau of Labor Statistics, Regional and State Employment and Unemployment Summary, October 21, 2005.

²⁸Survey of Forecasters, Federal Reserve Bank of Philadelphia.