Risk Management All The More
Critical With New Farm Bill

LUBBOCK — The new federal "Freedom to Farm" bill has been dubbed "Freedom to Fail" by its detractors. For farmers who’ve grown dependent on subsidies and price guarantees, whether it turns out to be the former or the latter may depend on how well they learn to manage risk.

That was the recurring theme here at a recent state agricultural summit addressing implications of the pivotal legislation. Freedom to Farm replaces traditional subsidies and controls with a declining schedule of direct payments over the next seven years and elimination of decades of government planting restrictions.

Speaking via satellite from Washington, U.S. Rep. Charles Stenholm, D-Stamford, encouraged listening farmers and ranchers to make the best of the legislation before them.

"It’s no secret that many were unhappy about the way the 1995 farm bill was put together," Stenholm said. "That’s behind us now. If we consider it a lemon, we have to make lemonade out of it."

He said lenders no doubt will be keeping a closer watch on agricultural borrowers now that government guarantees are ending. In terms of risk management, Stenholm said some other kind of safety net in addition to the current crop insurance system must be put in place.

Other issues with the potential to impact Texas agriculture, the representative added, include packer concentration, the rail merger and budget cuts.

"Budget cutting — that’s a big one," Stenholm said. "I’ve said many, many times that if all functions of the budget had taken as many cuts as agriculture since 1986, the budget would be balanced today and we could honestly be talking about a tax break. We know that hasn’t happened.

"The budget that originally passed the House this year proposed an additional 56 percent cut in agriculture — not subsidies, that’s pretty well tied down in the Farm Bill — but suggesting that we could cut 56 percent from research, education, rural development programs, etc."

In regard to the debate over Most Favored Nation status for China, Stenholm told listeners that he had no alternative but to support it.

"MFN does not give China any special recognition. It just says treat China like we do every other trading partner.

"Why should we do that?" he asked. "Well, agricultural exports in 1994-95 increased by 175 percent. U.S. ag exports to China topped $2.6 billion last year. In 1995, Texas alone was responsible for 23 percent of the U.S. ag exports to China, some $650 million."

With an immense population of 1.2 billion, 4.5 times more people than in the U.S., China’s demand for grain is expected to outstrip supply by more than 20 million tons as early as the year 2000.

In 1995 U.S. grain exports to China had reached 9.1 billion bushels. Cotton exports, he pointed out, increased from 497 million to 813 million pounds from 1994 to 1995 and beef consumption is growing by 10 percent annually or four million tons.

"Sure, we don’t like the way China does business, but we should have learned by now that we cannot unilaterally impose our will on any other country in the world. Therefore, it makes much more sense to continue to try and trade and get them to change, not punish them. If we deny them, our competitors will take that market from us, and the only people who will lose will be Texas farmers and ranchers."

Michael Helmar, senior analyst and policy analysis coordinator for Iowa State University’s Food and Agricultural Policy Research Institute, told listeners that Asian nations, with their high-growth populations and somewhat faster growing economies, are expected to be an area for growth for the U.S. in terms of agricultural exports.

Latin America’s population is growing about as rapidly as Asia’s, but experts say they’re not sure if the economies in the region are capable of growing enough to meet that demand.

The real problem, Helmar said, is in African countries whose populations are growing at three percent per year.

"The poorest countries in the world, no matter how fast their populations grow, cannot afford to feed their people. Their per capita consumption of grain, which is a staple for a lot of these countries, is declining. That, along with the reduction of subsidized exports, will make it a very real problem to feed these countries."

China, he noted, continues to be a wild card in terms of agricultural markets.

"Their population is urbanizing and in many cases the food has to be shipped in from their agricultural lands," Helmar explained. "In many cases it’s cheaper to import it than to have it brought in from the countryside where the transportation infrastructure does not exist."

Another noteworthy change occurring in China is declining per capita grain consumption and increasing meat consumption.

In 1993 China was an exporter of corn to the tune of about 10 million metric tons or about 400 million bushels, Helmar said. In 1994 they imported almost four million tons. The difference, he noted, went to supply their rapidly growing livestock industry, particularly the hog and poultry sectors. China is not expected to increase its wheat imports, Helmar added, and is expected to remain fairly self-sufficient in beef production.

The former Soviet Union has liquidated much of its livestock, so feed grain use has remained low.

Increased poultry production in Brazil and Thailand will force those countries to increase the amount of imported feed grains, primarily corn, into their country, Helmar continued. He advised, however, that it will be a slow growth.

Over the long term, he expects Eastern Europe to be an exporter of feed grains.

Helmar said U.S. competitors like Europe, Australia, Canada and Argentina are not expected to go heavily into feed grain production in the future. Rather, they will focus on wheat and oilseeds.

"So, in the case of feed grains, the U.S. is going to be sitting in a position where it can pick up a lot of that export market share, and much of that will come in corn and a little sorghum," he noted.

Beef production, the speaker said, is growing in some parts of the world. Australia is starting to feed more cattle rather than just graze them, but Helmar believes it will be done on a limited basis. Korea and Japan will likely increase beef imports.

Helmar said that as farm subsidies decline, the wedge between U.S. and world prices will narrow.

"It allows our competitors to see a higher price, but the U.S. farmer will be looking at price decline," he concluded.

The new farm bill, with its reduction in guarantees, will place a premium on accurate production forecasts. At the same time, said Dan Cassidy, director of development at the University of Missouri’s Food and Agricultural Policy Research Institute, the flexibility it provides makes a forecaster’s job much more difficult.

USDA, he said, is predicting on average a contract price of 61 to 67 cents a bushel on wheat over a seven year period and 32 to 37 cents a bushel on corn.

The one-time sign-up period which began May 20 and ends July 12 gives farmers the flexibility to withdraw at any time from that contract, but the only new acreage that will be allowed into the program is from CRP contracts that expire.

"We have reason to be fairly optimistic," Cassidy said. "In 1996, in the event that you do have a crop, payments would be somewhat higher given that you get a farm program payment in addition to some market return that you would otherwise not have gotten under the current 1990 farm bill program," Cassidy told listeners.

"We can expect very volatile markets in the short term," he continued. "It’s a weather-driven market at this point. The one thing we can’t control is the weather, and right now that seems to be dominating our forecast."

He also noted that the United States is expected to be in a good position in the world markets with the possible exception of wheat. Experts are also optimistic on pork and broiler exports and somewhat optimistic on cattle.

Dr. Kary Mathis, director of the Lubbock-based International Center for Arid and Semiarid land Studies, discussed agricultural lending adjustments that will be necessary for implementation of the new farm legislation.

Many commercial banks, Mathis said, are moving away from agriculture lending; alternative financial arrangements, such as joint ventures between various agribusinesses, are stepping up to fill that niche.

However, Mathis added, commercial banks in Texas, particularly in West Texas, are still active in lending to farmers.

Bankers, he said, seem to be cautiously optimistic for the first three or so years, but after that there’s much greater uncertainty.

He said farmers and ranchers will need much greater knowledge of marketing alternatives, including forward contracts and all their variations, to reassure their lenders. Other bankers believe there will be a need to change the lending culture, meaning borrowers will be required to supply more detailed financial information and specific marketing plans to complete a loan application.

Paul Engler, CEO of Cactus Feeders Inc., Amarillo, struck an optimistic note.

"When I first heard of that bill or the terminology, it really struck a thrill in my heart," Engler said, "because the word freedom means an awful lot to me. I think we need to focus on that very word. When you put your feet on the floor in the morning, you can go out there and do just about anything you want to do, and that should be worth a lot to you."

Farm policy over the last 60 years, Engler said, has in essence failed.

"The federal government has spent $200 billion since 1933; convert that to 1996 dollars and that’s about $450 billion in supply management programs. When you really sit down and analyze the whole thing, the very purpose they were put in place for, to raise crop prices, they were a failure," Engler stressed.

"About the only thing previous farm bills have accomplished was a cheap food policy, in my opinion. I don’t think we met the goal we were really after, to try and bring better economics into American agriculture with supply management."

He encouraged listeners to give the new farm bill a chance to work.

"There’s no question that in the first few years there’s going to be some agony and pain, but given a chance, over the long haul I think we have a lot of things going for us that will make this thing work."

One of those is the change in world trade policy.

"With the passage of GATT and NAFTA, you have a totally different picture," Engler said. "You have emerging markets that we’ve never had before, specifically the Asian rim. These people are not only willing to buy our products but they’re going to be demanding to buy our products. I really firmly believe in talking about a level playing field – that the American farmer can compete with anyone in the world.

Engler said he’s been told there are only four places in the world that have the resources to really be successful in raising significant crops for export – China, Ukraine, Argentina and North America.

"I’ve had the opportunity to visit all of them except for the Ukraine. I just got back from China, and I can assure you they’re not even in the hunt," Engler remarked. "We spent a lot of time in Argentina researching the possibility of cattle feeding opportunities, and they’re also a long ways from being in the hunt. They’re more restricted in their land areas."

He encouraged farmers and ranchers not to undersell themselves in terms of world agriculture and their competitiveness.

"Look at the whole program from a long range perspective. I think we’ll be thankful that the government did cut us loose."

When asked about captive supplies, Engler told listeners that contrary to popular belief, Cactus Feeders is not a proponent of packer concentration or captive supply.

"We’ve probably been rightfully accused of being one of the big offenders of captive supplies," Engler said. "But I’m not telling you anything I haven’t already told IBP — formula pricing is in the ditch."

He added, however, that he would hate to see the cattle industry go back to live animal selling.

Packer concentration, Engler admitted, is a serious issue.

"I doubt that any packers are doing anything illegal, but they have developed a tremendous amount of power in the last three or four years. But at the same time, we in the beef business didn’t do very much to thwart that power. I don’t have any good answers. I firmly believe you have to fight power with power."

He assured the crowd that his product disparagement lawsuit against Oprah Winfrey over the talk show host’s inflammatory "mad cow" episode was not a frivolous suit. "We’re out for the hunt," he said.