U.S. Ag Holds Tight
December 1, 2008 When financial market charts look like ski slopes, everybody gets nervous — including growers. The question is: How is agriculture positioned to weather the current financial troubles? For those growers who have been able to manage debt well in the past, credit should flow. For those who have had debt problems, the cost of credit will be higher.
Many ag economists agree that agriculture is in a fairly strong and stable position. The foundation of U.S. agriculture being able to weather this storm is its modern-time low debt-to-assets ratio, which USDA says is at 10%. Farm profits have been riding high as well, with five consecutive years of record exports. The forecast for 2008 pegs farm profits at a record-high $114 billion, up $32 billion over 2007.
However, to suggest that growers don’t have warning signals to worry about the future would be naïve. Credit, prices, costs, and exports will test the farm economy in 2009.
Business Structure Holds
According to Dr. Michael Swanson, vice president and senior economist for Wells Fargo Bank, there is money available to lend to farmers, but the price of money has changed. Swanson made his comments during an October webinar hosted by the National Agri-Marketing Association.
“First off, the business structure hasn’t changed,” he said. “You need to be a well-managed, properly-sized operation that is properly leveraged in terms of equity.
“We have had access to way more credit than we typically have had in the past, and many companies have found themselves with more debt-to-equity than they should have had historically.”
“Agricultural loans for operating expenses are usually made by institutions that are familiar with the producers’ operations and know the resultant risk of their operations,” says John Vansickle, director of University of Florida’s International Agricultural Trade and Policy Center. “The credit crisis is not likely to have a large impact on the markets for the products Florida vegetable growers produce. Because their business structure is not likely to change as a result of the credit crisis, they should continue to carry priority status from their lenders.”
Prices Down/Inputs Up
Prices for key crops like citrus are expected to be low heading into 2009, due to a glut of inventory and a higher than originally anticipated crop. Basic commodity crops like corn and soybeans have gradually been declining after scoring record highs.
While people have to eat, a recession will likely cut demand for certain food items, which could have a downward effect on prices. Meanwhile, growers have been paying a great deal more for inputs, particularly fuel and fertilizers. Fertilizer has nearly tripled in recent years.
According to USDA, farm production costs totaled $260 billion in 2007, up by 9.3%. Contributing to the increase percentage-wise were: fertilizer, lime, and soil conditioners, up by 26%; feed, up 21%; fuels, up 14%; agricultural chemicals, up 11%; and equipment, up 11%.
After peaking at nearly $150 per barrel, oil prices plummeted to below $70 in mid-October as global economies slowed. At about the same time, natural gas prices had fallen nearly 50% since earlier in the year. One side benefit of the slide in natural gas prices and slowing economic growth might be more favorable fertilizer prices in the future.
Role Of Exports
U.S. farm exports have broken records for a string of years, based partly on the weakness of the dollar. At press time, the dollar was showing relative strength against other global currencies. Logic would dictate that the dollar would fall after the financial bailout requires the government to print money.
However, the dollar was falling at slower pace than other key currencies, which gave it its relative strength.
According to Swanson, that relative strength could hurt ag exports in the coming year.
“Our dollar has shown relative strength recently, but it is not a fundamental strength, so we don’t know how long it will last,” Swanson said. “We have to be very careful on the impact of the stronger dollar given the export intensity we have in U.S. agriculture.”
Regardless of the dollar, a global recession will likely cut into key export-market demand for U.S. food crops.
Recovery Time
Predictions on how long it will take to stabilize jittery global markets and to see a recovery in the U.S. economy are all over the place. Some are projecting a prolonged recession, while others suggest a fairly strong bounce-back as early as the last quarter of 2009.
No matter the recovery time, Americans were reminded of the importance of economic discipline and the consequences of greed in this economic crisis.
Maybe they, too, were reminded a little of the importance of the basics in life like food and fiber and the men and women who grow it