Flood Costs Overflow Estimates

As flooding continues in the Midwest, economists are taking a more-sober look at the costs to those in inundated areas and the long-range impact on the national economy

AS the Great Flood of '93 continues to surge down the Mississippi, the estimates of its impact on the national economy are inching up.

Economists now believe that one of the spillover effects from the flood will be slightly higher food prices, reflecting a decline in the size of the corn and soybean crops. The United States Department of Agriculture (USDA) now believes that there will be "a modest effect on overall food prices this fall and into the winter." For the year, this will mean an increase of several tenths of a percentage point in the Consumer Price Index (CPI).

Aside from the higher costs to consumers, economists say that the total damage from the flood could be in the $10 billion to $12 billion range. This would be below the $15 billion in havoc caused by Hurricane Andrew.

[The Kansas River, which converges with the Missouri at Kansas City, Mo., was expected to crest at 55 feet July 27, well above the flood stage of 33 feet and close to the top of a 57-foot-high levee. The Missouri was expected to crest later in the day at 49 feet, 17 feet over flood stage and just below the flood walls, which are about 52 feet high, according to the Associated Press.]

Flood victims should get some financial relief from Congress, which was expected to pass a $2.98 billion supplemental financial package on July 27. Earlier in the day, the governors of Missouri and Iowa urged Congress to move quickly on a $3 billion flood-relief package for families and businesses in their states. The package had been stalled in the House since July 24, as lawmakers argued over how to pay for it.

Economists prefer to compare the flood damage to the 1988 drought, which shaved .2 off the nation's gross national product that year.

"We may be in the same ballpark right now," says Ed Lotterman, economist at the Minneapolis Federal Reserve Bank. But economists also are quick to point out that it is still too early to estimate the total cost because it continues to rain in parts of the Midwest, more levees continue to break, and the Mississippi is not expected to crest in St. Louis until Aug. 1.

"Forecasting is like throwing darts at a dartboard," says economist Kevin Kliesen of the St. Louis Federal Reserve Bank.

At the moment, Mr. Kliesen is estimating the cost of the flood to the St. Louis area at $1 billion to $2 billion. By way of comparison, the flood of 1973 caused about $800 million (in 1993 dollars) in damage. However, the flooding in 1973 came early in the year, and many farmers still planted their corn and soybeans after the floods receded. This year, the flood waters may not drain off farmland until mid-August, when it is far too late to plant.

Even if it stops raining in the region, farmers are still concerned because the corn crop is expected to be harvested late since the plants have not progressed as rapidly as they should have. "There is a big worry that there will be an early freeze," says Phillip Baumel, an agriculture professor at Iowa State University in Ames, Iowa.

If the weather patterns begin to return to normal, the USDA does not expect a significant impact on the nation's food supply. There are 2 billion bushels of corn in storage, and farmers in Indiana and Ohio expect to harvest a bumper crop. "I really don't think consumers will notice any difference," predicts Keith Collins, acting chief economist at the USDA.

Corn and soybeans are used predominately as feed for cattle, poultry, and pork. If feed prices rise, farmers tend to sell their animals. This initially depresses prices as more animals are butchered. However, it can cause shortages once those animals are processed.

At the moment, there are ample supplies of meat since fairly high prices have stimulated production over the past several years. The USDA had expected beef prices to decline this fall. Now, Mr. Collins says, "They may not decline as much, but they will be coming down from where they were earlier this year." Producers also report that cattle feed lots are so muddy it is becoming more difficult to manage the cattle. However, the cooler temperatures in the upper Midwest have been beneficial to hog productio n.

The effect of the flood on the economy won't be totally negative, since individuals will have to buy new carpets, wallboard, and anything else destroyed or swept down river. So far, the government estimates that 30,000 homes have been damaged. The cost of repairing the houses is expected to be less than after Hurricane Andrew, which completely flattened thousands of houses.

But few Midwestern residents had flood insurance compared with hurricane-hit south Florida residents. "That means we don't get the immediate injection of cash from insurance adjustors walking around with their checkbooks in hand," Mr. Lotterman says.

On July 26, transport companies were loading barges along the Iowa stretch of the Mississippi in McGregor, Dubuque, and Clinton. The barges become floating storage until the river is reopened. Filling the barges helps to empty grain elevators, which will be needed once farmers begin harvesting what is left of this year's crop.

Grain transporters expect backups at the major locks once the river is reopened. This could cause additional delays in getting grains to New Orleans for export. The delays might eventually result in a higher trade deficit for a few months. However, once the barge traffic gets caught up, the trade numbers should improve.