AgWatch


Farm Financial Health: Just How Bad Is It?

SARA WYANT

WASHINGTON, D.C.
   When commodity prices were hitting record highs a couple of years ago, farm bill critics often made the case that it was finally time to make deep spending cuts or eliminate farm subsidies altogether.
   Yet, several members of the House and Senate Agriculture Committees had a frequent refrain: “You don’t write a farm bill for the good times, you write a farm bill for the bad times that will invariably come.” 
   In many ways, that time seems to have arrived. Members of the Committee on Agriculture’s Subcommittee on General Farm Commodities and Risk Management recently devoted a hearing to documenting the changes taking place across a wide variety of operations.
   “Farm prices for many crops have dropped dramatically since the farm bill debate. Inputs costs continue to rise. Mother Nature continues to wreak havoc on some regions of the country.  Foreign competitors are sharply increasing their subsidies, tariffs, and non-tariff trade barriers,” noted Subcommittee Chair Rick Crawford, R-Ark., in his opening statement. “The EPA is pushing new and costly regulations.  Some in this country are standing in the way of critical tax relief, ranging from a permanent section 179 and bonus depreciation to repeal of the death tax.” 
   Ranking Subcommittee member Tim Walz, D-Minn., said farm financial health is also “significantly influenced by external factors; droughts, floods, disasters and disease can all have an impact on the farm which ripples outward and touches the entire rural community.
   “In Minnesota, and the Midwest, we are facing such a calamity now with the onset of avian flu,” Walz explained in his opening statement. “This outbreak places both a financial and emotional strain on the producers impacted. And you don’t have to have a flock test positive to be impacted. The stress created just knowing the possibility of loss is out there is enough of a burden. I heard one producer describe it as living in a “constant tornado warning.”
   In general, panelists agreed with Crawford and Ranking Member Tim Walz, D-Minn., that many sectors of agriculture are in a tough spot. Net farm income in 2015 is projected to be about 43 percent less than the record high $129 billion set in 2013. 
   New programs under the Agricultural Act of 2014 are expected to lead to a 15-percent increase ($1.6 billion) in government payments and fill part of that slack. At $12.4 billion, 2015’s expected payments would be the largest since 2010, USDA reported earlier this year.
   Texas cotton grower Steve Varett, who grows cotton, sorghum and wheat on farms east of Lubbock, Texas, described the current financial health of the farm economy in one word: Precarious.
   “Lenders in my part of the country tell me that as much as 65 percent of operating loans from last year had significant carry-over into 2015 because producers simply could not pay off their notes. Equipment dealers tell me that about half of producers in our area had to have their equipment notes restructured. Bankers pulled a rabbit out of the hat in getting a great majority of producers in our part of the country refinanced for 2015 in a time when it is very difficult to show a positive cash flow,” he noted.
   Nathan Kauffman, Assistant Vice President, Economist, and Omaha Branch Executive, Federal Reserve Bank of Kansas City, told the subcommittee that the farm income drop is mainly due to lower prices of major U.S. row crops, combined with “persistently high” production costs.
   “For example, corn prices are currently about 50 percent less than in 2013 and soybean prices have dropped more than 30 percent over the same time frame. Despite the lower commodity prices, input costs have remained relatively high, causing profit margins to weaken notably over the past two years,” he noted. Farmland prices have softened or declined in many areas.
   But the farm economic downturn is not consistent across all commodities or all regions and many farmers have managed more conservatively than in the past.
   Kevin Paap, president of the Minnesota Farm Bureau Federation and a corn and soybean producer in Blue Earth County, summed up the financial health of farm country in two words: “it depends.” 
   He noted that crop farmers faced steep price declines with high input costs while livestock producers saw 2014 as one of the best years ever.” His home state – which prides itself on being the nation’s top turkey producer- has been particularly hard hit by Avian Influenza, killing over 8 million birds and resulting in an estimated $113.6 million in losses. 
   “Financial stress – It’s here, it’s real and it’s challenging for many,” emphasized Paap. He said farmers are restructuring their debt to stretch out capital payments and more producers are turning to USDA’s Farm Service Agency for loans.
Several witnesses testified about how the economic downturn on the farm is starting to have a ripple effect throughout other parts of rural America. Paul Combs, who farms in Missouri’s southern Boot Hill region and operates 11 equipment dealerships in Missouri and Arkansas, said his equipment sales are down 15 percent year over year.
   “One of the first areas in which farmers try to control costs in the face of tighter margins is in their equipment investments,” Combs testified.
   Arkansas farmer Dow Brantley, who chairs the USA Rice Federation, said rice is the most “government-interfered crop in the world,” making it difficult for rice producers to compete with “foreign governments who illegally subsidize their crops and participate in unfair trade negotiations. “
   “Unfortunately, these bad actors are the same entities that set the world price and without a powerful farm bill, rice producers would be in more trouble economically than they are currently. It is critical that the U.S. government continues to go after the bad actors that put our nation’s rice producers at an unfair advantage, “Brantley testified. 
   Former Committee Chairman Frank Lucas, R-Okla., questioned how this current economic downturn in farm country compared to the 1980’s, when many highly-leveraged farmers were forced to quit as interest rates spiked to record levels and their farm debts ballooned.
   Kaufman said one of the biggest differences between this time period and the early 1980’s is that financial “leverage is not being used as extensively” and debt-to-asset ratios averaged about 10.6 percent last year. That situation is likely to worsen, however, as incomes drop and interest rates rise. 
   “So we did learn some lessons from the pain of almost 40 years ago,” Lucas pointed out. ∆
   SARA WYANT: Editor of Agri-Pulse, a weekly e-newsletter covering farm and rural policy. To contact her, go to: http://www.agri-pulse.com/

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