Drought Is Called Costliest Disaster--Except for War

The great drought of 1988 is the costliest natural disaster in America’s history, with economic losses exceeding those of any previously documented drought, earthquake, hurricane or flood.

Farm production alone will be reduced by an estimated $11 billion to $15 billion, the government’s Interagency Drought Policy Committee reported Friday.

Consumers, rather than farmers, will pay for most of the losses, and the impact will linger well into 1989, the committee and other economists agreed.

The lost farm production will affect one of the country’s most important economic indicators, the gross national product, reducing the index’s growth rate slightly this year, the report said.

“I think in current dollar terms there is not much doubt this is the biggest physical disaster that (agriculture) has encountered,” said Neil Harl, an agricultural economist. “And except for war . . . it ranks well up with all kinds of disasters.”

Before this year’s drought, the costliest national disaster in terms of economic losses--not in terms of death or injury--was Hurricane Agnes in 1972, according to disaster researcher James Cornell.

That storm caused losses in Pennsylvania and southern New York state totaling $10.24 billion, when translated into 1988 dollars. By comparison, the San Francisco earthquake of 1906 did an estimated $3.2 billion in damage in 1988 dollars.

In the 1988 drought, “consumers will be net losers,” said Mark Drabenstott, assistant vice president of the Kansas City Federal Reserve Bank.

And although many individual farmers will suffer significant losses, the key measure of farm economy health, net cash farm income, is likely to approach the levels of 1987, when the weather was normal. The reason: The drought has inflated prices farmers are receiving for commodities they do have to sell.

Most of the losses consumers pay will come in the form of higher food prices. The drought could hike the average annual food bill by $23 per person this year and by between $40 and $50 next year, based on one set of government indicators.

“When you have a disaster of this nature (with a demand for food that remains constant despite price increases) it boosts price and profitability disproportionately so it tends to cover up the loss and it extracts it from the consumer,” said Harl. “There is a mechanism at work by which prices are boosted and the costs are spread widely through the economy.”

Factors Shield Farm Economy

A variety of factors shield the farm economy from the full impact of the drought. First, many farmers store their harvests rather than selling them at a time when prices are traditionally at their lowest. As a result, farmers who had 1987 corn, wheat and soybeans in their storage bins could sell those crops at drought-inflated prices. Corn, for example, is selling for 30% more than a year ago and beans have almost doubled in price. However, many farmers may not have crops to sell next year, and that could be reflected in a reduced 1989 net cash farm income.

This year’s farm income will also be boosted, on an average, because some farmers lucky enough to be in areas that had either sufficient rain or irrigation will have abundant crops to sell at high prices. “The gains will be spread across a fairly small number of farmers, and those farmers are not going to share those gains with the people who lost,” Drabenstott said.

The government’s drought relief legislation, which President Reagan signed into law Thursday, will also help to shield the farm sector from the drought’s effects. That legislation, which Harl called “income replacement insurance,” could pump between $3.9 billion and $5 billion into the rural economy.”

“It’s interesting that people view agriculture as being a real victim of the drought,” Drabenstott said. “The problem is not that agriculture in total is the victim. The problem is that there are plenty of gains from a drought but the gains are not distributed across all farmers. . . . The gains are not occurring where the losses are.”

‘Consumers Will Pay’

“Consumers will pay the price for diminished production,” said Harl, while the government drought relief “eases the burden for the farmer and the people who rely on the farmer for business. . . . When you replace farm income, you’re helping the farmer and the machinery dealer and the barber and the drugstore and the community where the reduced farm income would have meant less economic buoyancy.”

Food is the biggest segment of the economy to be hurt, but other items are also going to reflect this summer’s extraordinary weather.

Prices for wood products, electricity, coal and some chemical products are all affected, to some extent. Dry weather has left forests vulnerable to fires and made weakened trees prey to insects and disease. Insufficient rainfall has lowered rivers, cutting into hydroelectric power generation and increasing the costs of river shipping. Shipping costs affect the prices of products ranging from coal and chemicals to petroleum and salt to keep the Midwest’s highways free of ice and snow next winter.

While it will take months to fully assess the drought’s damage to the national and rural economies, its wide-ranging impact is beginning to emerge in government data. For example:

--The value of corn lost because of drought is an estimated $5.24 billion while lost soybean production is valued at an estimated $2.41 billion. (Those figures are based on the average price farmers received for those crops over the last four years. Using that formula was suggested by several economists consulted by The Times who said using this year’s drought-inflated prices to compute losses would be unrealistic.) The corn and soybean losses are likely to increase if the bad weather persists--as government forecasters predict--and the autumn harvest falls short of current government expectations.

--The barge industry, which moves billions of tons of farm commodities, coal, petroleum and chemicals on the nation’s drought-lowered inland waterways could lose up to $1 billion this year, according to Friday’s drought assessment.

--Although there is no dollar estimate yet, the drought will affect the timber industry for the next 10 years to 20 years. So far, this year, 62,000 wildfires have damaged 2.7 million acres--more than double the damage in 44,000 fires reported by this time last year. Drought-weakened forests are also being hit by disease and insects. “Timber harvesting from public lands will have to be reduced for the next one-to-two decades to compensate for tree mortality and growth loss due to the drought of 1988,” Friday’s report said.

Impact on Fisheries

--Salt water fisheries in the Gulf of Mexico are likely to see a reduction in mackerel catches because of reduced fresh water into the Gulf from the Mississippi. Stream flows in California’s upper Sacramento River are so low that the National Weather Service is predicting warm water temperatures lethal to salmon. The loss to the California and Oregon fishing industries this year is estimated at between $55 million and $82 million.

--As hydroelectric power facilities are affected by reduced river flows, utilities are being forced to buy energy at higher costs to meet local and regional demands, raising electricity costs in some regions.

Researchers Ruth Lopez and Rhonda Bergman in Chicago, Aleta Embrey in Washington and Doug Conner in Los Angeles contributed to this story.