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April 6, 2001

A&M Study:
More problems in farm country

By Blair Fannin
Extension Communications Specialist

Net incomes for farmers are expected to continue to decline this year not just because of low commodity prices, but high fuel and fertilizer costs as well—though the outlook for cattle producers is somewhat brighter thanks to higher prices, increased beef consumption and cheap grain.

According to an economic baseline outlook report compiled by economists with the Agricultural and Food Policy Center at Texas A&M University, cotton farmers in Texas and California who rely heavily on irrigation will see those costs continue to rise even through 2005—largely in part because of high natural gas prices.

"Irrigated cotton and irrigated feed grain crops as well as rice farmers will feel the effects of these high prices," said James Richardson, an economist with the Agricultural and Food Policy Center. "They experienced high fuel costs last year...roughly fuel costs went up more than 30 percent last year. The bad news is those prices are not going to come down. We've started 2001 with higher fuel prices, and fertilizer costs are projected to be 35 percent higher than what they were last year.

"You couple those two factors with low commodity prices and it results in a cash flow problem. None of the farms that we included in the study show significant probabilities of generating a cash-flow surplus."

The A&M study analyzed more than 75 representative crop, livestock and dairy operations across the country. It projects the economic viability of those operations over the next five years (2001-2005).

To offset rising operating costs, farmers will continue to depend more on government payments to maintain their position, Richardson said.

"Without these payments, we can expect to see a lot more problems in cash flow," he added.

Cattle producers are currently receiving higher prices, Richardson said, but Texas producers are still recovering from the effects of several droughts over the past five years.

"What's happening is a lot of ranchers are having to adjust because they lost quite a bit of money over the past five years due to drought and low prices," Richardson said. "They need the projected higher prices to compensate for losses incurred over the past five years, so it's not all roses either. Of the four ranches we analyzed, three look to be in good financial condition and one will still be marginal in 2005."

The study revealed the following:

•Crop farms: Thirty-two of the 42 crop farms in the study have more than a 50 percent chance of cash flow deficits over the 2001-2005 period. Currently, low crop prices and the prospect for a slow recovery are the major factors behind the poor cash flow performance of the crop farms, the study indicates.

•Feedgrain farms: Fourteen of the 15 feedgrain farms have probabilities greater than 50 percent they will experience cash flow problems in 2001-2005. Nine of the 15 farms have probabilities greater than 50 percent of losing real net worth between 2000 and 2005. The financial condition of the 15 feedgrain farms indicates 13 are poor, two marginal, and none will be in good financial condition by 2005.

•Wheat farms: Six of the wheat farms have a greater than 50 percent probability they will experience cash flow problems in 2001-2005, the study shows. Six of the farms have greater than a 50 percent chance of losing real net worth by 2005. Overall, six of the 10 wheat farms are likely to be in poor financial condition by 2005, two are marginal and two are in good financial condition.

•Cotton farms: Eight of the nine cotton farms are projected to have greater than a 50 percent chance of cash flow deficits in 2001-2005. Seven of the nine will face high probabilities of losing real net worth. Seven of the nine cotton farms will be in poor financial condition by 2005—two are marginal and none are in good financial condition.

•Rice farms: All of the eight rice farms in the study are projected to have greater than a 50 percent chance of cash flow deficits over the 2001-2005 planning horizon. Five of the farms will likely have high probabilities of losing real net worth. Overall, six farms will be in poor shape, and two will be in marginal shape by 2005.

•Dairy farms: Dairy farms appear in moderate to poor financial shape over the 2001-2005 period. Low feed costs and higher cattle prices are not able to fully offset lower milk prices. Fifteen of the 26 farms have high probabilities of cash flow deficits. Overall, 14 of the 26 dairy farms are classified in poor financial condition, three marginal, and nine in good financial condition by 2005.

•Cattle operations: Increasing cattle prices should help to improve the financial viability of cattle operations. One of the four cattle operations will likely be in poor financial condition in 2005, and three are in good financial shape.

•Hog farms: Higher hog prices following the low prices in 1998 and 1999 improve the financial condition of the farms included in the study over the recent past. Only one of the six farms is expected to have a high probability of cash flow deficits over the 2001-2005 planning horizon.

Overall, one of the six farms is classified as being in poor financial condition in 2005, two are marginal, and three are in good financial condition.

In many cases, Richardson said farmers are finding innovative ways to make their operations more efficient to combat higher operating costs and low commodity prices.

"There are a lot of farmers out there reducing chemicals to a minimum, reducing labor hours, machine hours used...they are being good managers and also improving their marketing skills. I'm optimistic for them. Our analysis shows a majority of them need to increase net income 10 to 20 percent to prevent the loss of real net worth over the next five years."