Drought impact both producers and agribusinesses. This study investigates the impacts of the 2004-2007 droughts on Oklahoma grain handling and fertilizer supply firms. The results indicated an average decline in firm revenues of 30%. Individual firms had single year revenue declines of 85% and drought period declines of 75%.Agribusiness, Environmental Economics and Policy,

Kenkel, Philip L.

Kim, Taeyoon

English

Research Papers in Economics

 
 
 
 
The Impact of Drought on Grain Handling Firms 
 
Taeyoon Kim 
Research Assistant 
Department of Agricultural Economics 
 Oklahoma State University 
Stillwater, OK  74078 
taeyoon.kim@okstate.edu 
 
Philip Kenkel 
Professor 
Department of Agricultural Economics 
 Oklahoma State University 
516 Agricultural Hall 
Stillwater, OK  74078 
Phone: (405) 744-9818 
Fax: (405) 744-8210 
Phil.kenkel@okstate.edu 
 
 
 
Selected paper prepared for presentation at the Southern Agricultural Association Annual 
Meeting Dallas Texas, Feb 2-5 2008. 
 
 
 
 
 
Copyright 2008 by Taeyoon Kim and Phil Kenkel, all rights reserved.  Readers may make 
verbatim copies for non-commercial purposed by any means provided this copyright 
notice appears on all such copies.The Impact of Drought on Grain Handling Firms 
 
Abstract 
Drought impact both producers and agribusinesses.  This study investigates the impacts 
of the 2004-2007 droughts on Oklahoma grain handling and fertilizer supply firms.  The 
results indicated an average decline in firm revenues of 30%.  Individual firms had single 
year revenue declines of 85% and drought period declines of 75%. 
 
Background 
The risks and impacts of drought and other adverse weather on crop producers are 
well recognized.  Commonly recognized impacts from drought include reduced crop 
yields, reduced pasture and rangeland productivity and increased livestock mortality 
rates.   These impacts lead to a reduction in farm income with ripple impacts throughout 
the local rural economy.  A wide variety of policy tools have been developed to mitigate 
producer’s risk from adverse weather.  Multiple-peril crop insurance (MPCI) are 
available for most crops with a variety or options including yield based plans, revenue 
assurance plans and catastrophic coverage.  Producers in regions heavily impacted by 
drought may also receive funds through federal disaster assistance programs. 
Grain handling firms and other agribusinesses are also face weather related risks.   
Grain elevator managers often contend that drought impacts their firms more than grain 
producers.  Grain elevators receive income through a per bushel sales margin and storage 
charges.  Both of these income streams are impacted by drought and other adverse 
weather that reduces area grain production. Because their margins are largely volume 
related, grain handling firms do not benefit from the higher crop prices that may be 
associated with an adverse production year.  Grain elevator managers also often contend 
that grain storage income is disproportionately impacted during short production years 
because producers sell their crop more rapidly to meet cash flow needs.   Sustained drought may also reduce fertilizer sales.  Fertilizer application rates are 
presumably based on soil test information and yield goals.  Soil tests following a drought 
year would be expected to show higher residual as some portion of the previously applied 
fertilizer may be available.  A poor production year could cause producers to lower their 
yield expectations and reduce fertilizer rates.  Drought impacted producers could also 
reduce fertilizer inputs due to cash flow constraints.   
Grain handling firms and other agribusinesses do not benefit from crop insurance 
and disaster assistance programs which are targeted at the producer level.  Crop insurance 
programs generally allow producers to “disaster out” crops at low yield levels, allowing 
the producer to receive an indemnity without harvesting the crop.  While beneficial to the 
producer, this practice further reduces a grain handling firm’s potential throughput. 
Hard red winter wheat is the major crop in Oklahoma with over 2 million acres in 
production.  One implication of continuous wheat cropping system is that wheat 
producers and grain handlers are more severely impacted by droughts relative to other 
areas where producers are diversified across summer and winter crops.  Oklahoma 
experienced below average wheat crops in the 2005, 2006 and 2007 crop years (Table 1).  
Oklahoma’s state wheat production for the 2005-2007 period averaged 70% of the 
average of the previous 5 year period.  In some counties the 2005-07 period average was 
less than 25% of the 5 year average.  Due to the escalation of wheat prices during the 
same time period, the value of wheat production actually increased. 
During the fall of 2007 a collation of agricultural industry organizations organized 
a forum with Oklahoma policy makers.  The purpose of the forum was to call attention to 
the adverse impacts of the three year drought and explore possibilities for state level assistance.  This effort brought to light the need to better understand and quantify the 
drought impacts on diverse sectors of the agricultural economy.  The Oklahoma Grain 
and Feed Association, an industry organization representing Oklahoma grain handlers 
requested assistance in determining the drought impacts on grain handling and farm 
supply firms. 
 
Table 1: Oklahoma Wheat Production 
 Average  2000-
2004 
2005 2006 2007 
Bushels 
Produced 
139,196,562 128,000,000 81,600,000  98,000,000 
Percent of  200-
2004 Base 
Period 
100% 91.9%  58.6%  70.4% 
Value of 
Production ($) 
383,019,800 459,962,000 383,601,000 640,000,000* 
Percent of  200-
2004 Base 
Period 
100% 120.0%  100.2%  167.1% 
Source: Oklahoma Agricultural Statistics , *estimated 
 
Previous Research 
The impact of weather related risks on agricultural producers has been an 
extremely popular research topic for agricultural economists.  Numerous studies have 
examined the impacts of drought and other events and effectiveness of strategies to 
reduce these risks.  Morehart et al. examined the national impacts of the 1999 drought on 
the agricultural economy.  The report concluded that the drought reduced farm income by 
$1.29 billion with the hardest hit areas in the Northeast bearing 62 percent of these losses. 
While the impacts were very significant in the severely effected areas they represented 
only 3% of expected U.S. farm income.   Leistritz, Ekstrom, Wanzek and Mortensen examined the impacts of the 1988 
drought on North Dakota producers.  Their survey results indicated drought losses of 
71% for small grain producers.  Ninety one percent of the respondents reported receiving 
drought assistance with the payments averaging over $14,000.  Sixty one percent of the 
respondents indicated that they had crop insurance coverage with loss payments 
averaging over $12,000.  Net cash income for 1988 was reported to be similar to 1987. 
Johnson and Smith examined the adverse impacts of the prolonged 1998 to 2001 
drought on North Central Montano.  In addition to impacts on agricultural producers the 
authors noted that “upstream and downstream, agribusinesses experienced reductions in 
the demand for inputs such as fertilizer and machinery and reduction in throughput in 
grain and other crop handling facilities.”  The study did not attempt to quantify the 
drought impacts on agribusiness and the authors noted “…publically available data useful 
for tracing the adverse impacts of drought on agribusiness are sparse.”   
While tracing drought impacts on agribusiness is difficult, a number of studies 
have modeled the indirect and induced (multiplier) effects of drought on agricultural 
economies.  Diersen and Taylor used an IMPLAN model to investigate the impacts of 
2002 on South Dakota.  In addition to direct impacts on agricultural producers of $642M 
the results indicated induced and indirect impacts of 760M.  Flanders, McKissick and 
Shepherd used a similar approach to measure the impacts of the 2007 drought on the 
Georgia economy.  The study determined that producers bore direct losses of 787M while 
the total impact on the economy was estimated at $1.3B.  While reflected the impact of 
drought on agribusiness, the IMPLAN approach does not quantify impacts on specific 
agribusiness industries such as grain handling firms. Objectives 
The objective of this research is to explore and quantify the impact of three consecutive 
years of adverse weather on Oklahoma grain handling and farm supply firms.  Impacts on 
fertilizer sales are also investigated and the impact of multiple branches in diversifying 
weather risk is also examined. 
Data and Methods 
In cooperation with the Oklahoma Grain and Feed Association a survey of all licensed 
grain warehouses in the state of Oklahoma was conducted during the fall of 2007.  The 
survey elicited information on grain and fertilizer warehouse capacity and historical grain 
and fertilizer sales.  The managers were also asked to estimate grain volume, grain 
margin and storage income and fertilizer margins, for the 2005, 2006 and 2007 seasons.  
The survey was sent to 189 main office and branch locations and 113 managers 
responded.  The responses included managers contacted in follow up phone surveys. 
 
Results 
Before discussing the survey results it is important to acknowledge the limitations 
of the data.  The survey was designed to be quick and easy for the managers to complete.  
The information on grain volume and grain and fertilizer margins was based on estimates 
supplied by the responding managers.  Some managers supplied precise values while 
other managers provided estimates rounded to the nearest thousand or ten thousand units.  
It should also be noted that while the survey questions elicited information on fertilizer 
profit margins, information on application services was not elicited.  This omission may 
have distorted the true changes in fertilizer related revenue since some firms build margin structures into application charges.  Finally, while the survey instructions elicited 
information from the single location it is possible that some responding managers 
included information from branch locations leading to double counting.  Conversely, 
many surveys mailed to branch locations which were operated on a seasonal basis were 
not returned and these type operations were probably underrepresented in the results. 
The responding elevators reported grain receipts of slightly over 1.1M bushels 
with grain related income (margin and storage charges) of approximately $470,000 and 
fertilizer margin income of $72,000 for the base year period (Table 2).  The reported 
margins from fertilizer sales were lower than anticipated, suggesting than some firms 
may structure fertilizer profits through application charges. As expected, the results 
indicated that Oklahoma grain and farm supply firms were substantially impacted by the 
three drought seasons.  Reported grain throughput for the three year period averaged 70% 
of the previous five year average, a result which matched state production data.  Grain 
margins and storage income followed a similar pattern.  This result did not support the 
contention that elevator storage income falls disproportionately in short crop years as 
producers sell grain more rapidly to meet cash flow needs.  Fertilizer margins for the 
2005, 2006 and 2007 seasons were substantially lower than levels reported for the base 
period.  However, the decline was less pronounced relative to the decline in wheat 
throughput.  
Table 2 Average Grain Throughput and Fertilizer Volume for Responding Elevators 
 2000-2004 
Average 
2005 2006  2007 
Grain Throughput (bushels)  1,173,936  1,054,516  716.318  790,998 
Grain Margins and Storage 
Income ($) 
$469,578 $421,806  $272,201 $208,489 
Fertilizer  Margins  ($)  $72,784 $70,436  $49,041 $52,944 
Grain Throughput relative to 
2000-04 Average 
100.0% 88.3%  59.3%  64.8% 
Grain Margins and Storage 
Income Relative to 2000-04 
Average 
100.0% 89.8%  57.8%  65.7% 
Fertilizer Margins relative to 
2000-04 Average 
100.0% 91.1%  67.4%  72.7% 
 
While the adverse crop conditions during the 2005-07 period were perceived to be 
wide spread, the reported impacts on grain and fertilizer income varied dramatically 
across respondents (Tables 3, 4).  Some elevator locations were severely impacted with 
reported income for the 2005-07 period of 25% of the base period.  Conversely some 
firms reported higher income for the 2005-07 period suggesting that their was less 
impacted by the drought and/or experienced low yields during the base period. 
 
Table 3: Grain Throughput as Percent of Previous 5 Year Average 
  2005 2006 2007 
Average  88.3% 59.3% 64.8% 
Minimum 
Response 
24% 17% 15% 
Maximum 
Response 
179% 172% 185% 
 
 
Table 4: Elevator Margins from Grain and Farm Supply Relative to 
Previous 5 Year Average 
 2005  2006  2007 
 
2005-07 
Average 
Average  89.8%  56.8% 64% 70.4% 
Minimum 37.1%  15.4%  16.1%  25.4% 
Maximum 158.8%  140.1%  171.7% 137.0% 
 Similar to other regions, the grain handling and farm supply industry in Oklahoma 
has been rapidly consolidating.  The Oklahoma Grain and Feed Directory list 189 
individual elevator locations and 53 firms.  This reflects the fact that many firms have 
expanded to multiple locations through acquisition and mergers.  One rationale for 
consolidation of elevator and farm supply firms is to obtain greater geographic 
diversification.  In order to examine whether elevator and farm supply firms with 
multiple locations were in fact less impacted, the results for elevator firms with over 5 
locations (as listed in the Oklahoma Grain and Feed Directory) were combined (Table 5).  
The results suggested that the number of branch locations had little influence on the 
firm’s ability to maintain income during drought periods.  Elevator firms tend to expand 
into locations overlapping or adjacent to their existing trade territory.  This consolidation 
strategy may provide relative little geographic diversification.  Previously acknowledge 
shortcomings in the data may also contribute to this unexpected result. 
 
Table 5 Elevator Margins from Firms with 5 or More Branch Locations 
Relative to Previous 5 Year Average 
 2005  2006  2007 
 
2005-07 
Average 
Average 87.4%  56.7%  62.9%  69.1% 
Minimum 55.7%  33.6%  22.6%  46.4% 
Maximum 129.4%  140.1%  166.5%  124.0% 
 
 
Implication and Discussion 
The survey results confirm and quantify the impact of adverse weather on grain 
handling firms and other agribusinesses which provide marketing and farm supply 
infrastructure for producers.  While the increase in wheat prices offset some of the 
drought’s impact on wheat producers (at least the sub-set that had grain to sell) grain handling firms experienced a 30% decline in revenues.  Some firms were severely 
impacted with one firm reporting a 85% revenue decline during 2006 and a 75% decline 
over the entire 2005-07 period.   
Fertilizer revenue was less severely impacted.  This suggests that, contrary to the 
beliefs of farm supply mangers, producers do not limit fertilizer expenditures due to 
drought related cash flow pressures.  Farm supply firm managers may also adjust margin 
structures during low volume years.  Firm with multiple locations appeared to experience 
impacts similar to single location firms.   
The impacts of drought an adverse weather on the revenues of agricultural 
producers has been widely recognized.  Federal farm policy, periodic disaster assistance 
programs and various risk management tools are all designed to address these losses.  
This, admitally simple, research suggests that agribusiness firms providing marketing 
services and agricultural inputs are also severely impacted by regional droughts.  Weather 
related future contracts along with associated derivative products have been available on 
the Chicago Mercantile Exchange since the late 1990’s and have been used by utility 
companies as a risk management tool.  The usefulness of these products or other 
strategies to address the weather related risks of grain handling firms would be a topic 
worth of additional research.  
References 
Diersen, M. and G. Taylor.  “Examining Economic Impact and Recovery in South Dakota from 
the 2002 Drought”  Economics Staff Paper 2003, Department of Economics, South Dakota 
University, Dec 2003. 
 
Flanders, A., J. McKissick and T. Shepherd.  “Georgia Economic Losses Due to 2007 Drought”  
University of Georgia Center for Agribusiness and Economic Development, Report CR-07-10, 
July 2007. 
 
Johnston J. and V. Smith. “Adverse Impacts of Drought on Crops and Crop Producers in the 
West” Western Economics Forum, Volume 2, No. 1 Spring 2003. 
 
Leistritz, F. L., B. L. Ekstrom, J, Wanzek and T. L. Mortensen.  “Economic Impacts of the 1988 
Drought in North Dakota:  A 1989 Update of the Financial Conditions of Farm and Ranch 
Operations” Agricultural Economics Report #238, Department of Agricultural Economics, North 
Dakota University, August 1989. 
 
Morehart, M., N. Gollehon, R. Diismukes, V. Breneman, and R. Heimlich.  “An Economic 
Assessment of the 1999 Drought: Agricultural Impacts are Severe Locally, but Limited 
Nationally.  Agricultural Information Bulletin No. 755, U.s, Department of Agriculture, 
Economic Research Service, September 1999. 
 

The Impact of Drought on Grain Handling Firms

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