COLLEGE STATION Farms across the United States are under considerable cash flow pressure because of low prices, according to a study released March 11 by the Agriculture and Food Policy Center (AFPC) at Texas A&M University. The droughts and other adversities of 1996 and 1998 have only aggravated in the Southern Plains and the southeastern U.S.
Dr. Ed Smith, agricultural economist with the Texas Agricultural Extension Service, in a report to Congress said, “The bottom line is that the majority of the crop farms we monitor, unlike previous years, are under considerable financial pressure. These farms have high probabilities of not being able to cover their cash expenses and will need to look for ways to refinance their loans.”
The report also predicts that these difficulties will persist for the next two or three years, he said. This is due in part to gloomy forecasts of foreign demand and resulting projections of low prices, he said.
AFPC and the Food and Agricultural Policy Research Institute (FAPRI), a consortium of universities that provide analyses of international and U.S. supply, demand and price conditions for agricultural commodities, are commissioned by Congress to analyze the impact of governmental policies on agriculture. Study panels of producers are drawn from about 80 farms and ranches throughout the United States. AFPC faculty used producers’ data to simulate economic activity on “representative” farms or ranches in different regions across the United States.
The study includes commodities that are significantly impacted by farm and agricultural policy, such as wheat, feed grains, cotton, rice, pork, beef and dairy cattle.
According to the report: Six of the 13 simulated feed grain farms had at least a 25 percent chance of a negative net cash farm income in any one year from 1996 until 2002. Seven of the 10 representative wheat farms had at least a 40 percent probability of experiencing annual cash flow deficits. All of the cotton farms are projected to have serious cash flow problems over the 1996-2002 study period. Six of the nine simulated rice farms experienced cautionary cash flow deficits over the study period.
Livestock producers are experiencing the same cash flow problems, but improved prices projected for cattle and pork over the next five years will likely improve the current situation. Beef cattle are in the upward portion of the price cycle, and he predicts hog prices will improve as well.
“Our dairy sector looks strong in terms of equity,” Smith said. Nine of the 26 monitored dairy farms have experienced increased cash flow pressure but not at such high levels that they cannot stay in business.
This is the first time AFPC has found significant cash flow stress in all sectors of agriculture. Still, a casual look at agriculture does not reveal the depth of the problem.
Smith said the value of farmers’ collateral their land is strong.
“FAPRI does not project a downturn in land prices,” Smith said. “While their wealth base is holding its own, their ability to meet day-to-day expenses is a major concern.”
Dr. Carl Anderson, Extension economist, explained that the 1996 Farm Bill was built on the assumption there would be a continuous expansion in export markets for U.S. commodities.
U.S. producers took advantage of provisions in the bill that allowed them the freedom to plant alternative crops without acreage restrictions. Additionally, bumper crops flourished in favorable weather across most of the world.
“At the same time, export markets faded because of the economic and currency crises in Asian countries, Russia and Brazil,” Anderson said. “The world has been producing more and using less.”
Smith said it is difficult to estimate how many farmers could actually go out of business. He did note that it is likely there will be a significant transition in agriculture.
Moderate-size commercial producers will either have to decide whether to go smaller and depend on off-farm income for support or to grow larger in order to achieve the economics of size and scale that turn a profit, he said.
However, “just getting larger will not be a silver bullet for them,” Smith said. “By getting larger, producers are exposed to substantially more financial and economic risk, and they will have to be more attuned to managing that risk with management tools available to them.”
Some regions may even experience a change in types of crops produced. In areas of the southeastern United States and the Mississippi Delta where cotton has been king, farmers may switch to corn, wheat or soybeans. We see producers with adequate irrigation in much of the Texas High Plains turning from cotton to peanuts, Smith said.
Texas A&M’s agricultural economists are encouraging farmers and ranchers, especially given poor markets, to analyze available risk management tools such as contracting, cooperative activities or crop insurance.
“We understand their anguish about their cash flow in the next two to three years, and cannot offer a lot of encouragement to them that prices are going to turn around,” Smith said. “We are urging them not to let the anguish of the near-term blind them to the fact that they need to strategically position their operation for survival over the next five to 10 years.”
Farmers and lenders need to recognize the long-term opportunities that exist in agriculture and adjust operations accordingly.
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