Commodity markets already have taken notice of the projected yield losses. At the end of trading on Tuesday (July 3), corn cash prices were up about 27 percent, and soybean prices were up about 5 percent.

But Hurt said that might not be enough to compensate producers' lost farm income from low yields.

"Indiana is the worst hit of the major corn and soybean states," he said. "This is a situation where Indiana's average yield losses might not be compensated by high enough prices, and revenues can fall sharply — a potentially difficult financial situation."

The higher grain prices also could have a ripple effect on animal agriculture, which relies heavily on corn and soybean meal to feed livestock. Forages also will be in short supply.

"The animal production sector also faces the potential for large financial losses due to much higher feed prices for corn, soybean meal and forages for dairy, beef and sheep herds," Hurt said.

The effects of the drought also could touch agricultural businesses, such as handlers and processors, equipment dealers, and seed, fertilizer and pesticide providers.

Ultimately, consumers are likely to see an increase in food prices of 2.5 percent to 3.5 percent into 2013, Hurt said.

One bright spot for crop farmers is that they enter the 2012 drought in a better financial situation than what farmers experienced leading up to the drought of 1988, which devastated crops.

Hurt said farm incomes have been stronger in the past two years and that with land values at record-high levels, crop farmers have generally higher net worth.

Crop insurance also could play a major role in helping farmers avoid devastation this year, Hurt said. About 75 percent of Indiana crop acres are covered by some form of crop insurance.

"But crop insurance generally does not provide for full recovery of losses," he noted. "It is often used to help avoid catastrophic financial losses."

Crop insurance commonly covers 65 percent to 85 percent of a crop's overall estimated value, depending on the type and levels of coverage farmers select.

Purdue Extension has compiled drought resources for grain and livestock farmers as well as consumers. Links to those resources are available at http://www.purdue.edu/drought.