Agriculture Is Weathering the Fiscal Storm
The financial markets in specific and the populous in general spent the last week to ten days gripped by news coverage of a “financial crisis” referred to as everything from “unprecedented” to “Great Depression 2.” While the ultimate cost of poor policymaking decisions and corporate foolishness won’t be known for some time, it is obvious that something significant is happening in our nation’s fiscal infrastructure. The question came up during our coverage of the situation, “How is the overall financial panic affecting agriculture?” The answer is simply that agriculture is by and large better prepared to handle the current market malaise, but farmers aren’t out of the woods yet.
The American Farm Bureau Federation released an economic analysis paper earlier this week attempting to tackle the issue of how farm country is handling the situation, focusing on things like the “credit crunch” and the broader impact of the market on commodities and farm gate pricing. Interestingly enough, the biggest concern raised in the Farm Bureau study is that the overall gloom permeating the mainstream press on this issue will temper both global and domestic demand for agricultural products, potentially shifting us away from the demand-driven market we’ve enjoyed the past two or three seasons, and back into a much more challenging supply-driven market, a market orientation farmers have been dealing with since the Carter Administration.
In other words, the biggest concerns outlined by Farm Bureau economists were not the most obvious. The Agriculture Department is projecting record high farm income in 2008, which is certainly good news, although the costs of production are also at record highs due in large part to the exorbitant cost of energy. Another key measure of economic health in farm country, debt-to-asset ratio, is at a modern low of 10 percent. As one area farmer put it to me this week: “We remember the lessons of the 80’s.” Which is a point that apparently has been lost on the broader financial community.
I’ve heard the sentiment about the 80’s more than once in the past few weeks. I first started hearing that dark period in American agriculture invoked in reference to the ever-escalating value of land and cash-rents. Producers went on a glut in the late 70’s and began buying up land with little regard for price and potential profitability. Many of the producers over-leveraged themselves and aren’t in the business of farming today as a result. Similarly, the financial wizards on Wall Street have had plenty of experience with market turmoil, accounting malfeasance, bad loan deans (anyone remember the S&L debacle of the 80’s?), and such to have seen warning signs here. The problem, obviously, is that too few learned from the mistakes of their predecessors.
While farmers appear to have much better institutional memory than their fiscal counterparts in those fabled ivory towers, all is not roses and posies. The aforementioned cost of energy is of critical concern. As of this writing, the price of crude oil is in the mid-$90’s, but in the past 48 hours has traded in a $10 range. By the time you read this the price could be $10 higher or lower. Of course, crude is not the only concern, though certainly the diesel bill at the farm is a major line item in the annual budget. Farmers are also paying unprecedented prices for key energy-driven inputs such as nitrogen, phosphorous, and potassium.
Nitrogen prices are high because Natural Gas prices are higher. Much like crude oil, further exploration and development of this resource will help, however as with all three of these critical inputs, production might be an even larger concern. The number of firms, particularly the number of domestic firms, producing these products are at historically low levels, driven out of business due to climbing costs and regulatory burden. American Farm Bureau Senior Economist Terry Francl says “Fertilizer prices have basically doubled in the past two years and continue to rise.” “Farmers are currently being asked to make commitments for their 2009 fertilizer needs and to pay a substantial portion of that commitment, sometimes 100 percent up front. The credit function of these transactions is being shifted from the fertilizer producers and retail dealers to the farmers. The net result is that it increases the farmer’s cost.”
Which brings us back to the “credit crunch.” While interest rates from the Fed are still at relatively low levels, the tightening of the banking belt has pushed the cost of credit higher, and while the Farm Credit System is doing extremely well and appears to be insulated from the overall banking debacle, farmers are still bringing far more leverage to their balance sheets. Because the costs of production have skyrocketed as Francl noted, the amount of money a farmer is borrowing to produce his crop is skyrocketing as well. While I mentioned the historically low debt-to-asset ration of 10%, remember that farmers are typically what we call “asset rich, and cash poor.” The value of equipment and land have also gone up in recent years due to simple supply and demand, meaning an operation may very well have a strong net-worth with relatively tight liquid assets. Hence, when the producer sits down with his banker to figure the next season’s operating line of credit, he’s forced to borrow anywhere from two to three times the amount of money necessary to farm the same amount of land as he needed three or four years ago.
So what does all this mean for the average consumer? Francl sums it up: “The net impact of either the higher cost or lower prices is the same – less income for farmers.” Francl admits “there are many factors other than just credit availability affecting the returns to U.S. agriculture, but the current financial instability simply serves to exacerbate the already volatile input/output price situation.” And if there is less income for the farmer, there is less incentive to stay farming… which is a very big concern for all of us who eat food.
The good news is simply this: farmers are some of the sharpest businesspeople in the country. They’ve learned, by and large, the lessons of their past and their predecessors, and are in much better shape to weather the current situation as a result. On the bright side, farmers are the eternal optimists; there’s always next year, they say. The first and last paragraphs of E.M. Tiffany’s inspirational FFA Creed say it best:
I believe in the future of agriculture, with a faith born not of words but of deeds – achievements won by the present and past generations of agriculturists; in the promise of better days through better ways, even as the better things we now enjoy have come to us from the struggles of former years.
I believe that American agriculture can and will hold true to the best traditions of our national life and that I can exert an influence in my home and community which will stand solid for my part in that inspiring task.
Andy’s weekly column can be found in the Logan County River Current, and in the online edition.