Economist Sees 1998 As One
Of Most Difficult For Ag

By Jose G. Peña
Extension Economist

As we enter the fourth quarter, it is clear that 1998 will be one of the most financially difficult years for agricultural producers since the early '80's. After last year's near record high farm and ranch income, net U.S. farm income will drop significantly in 1998, especially in Texas.

Texas suffered a debilitating drouth during spring and early summer, the most productive period of the year. This was followed by excessive rains in August that seriously damaged cotton and triggered an infestation of army worms and other pests which are causing severe problems to crops, pastures and ranges.

This devastation from natural disasters came at a time of huge U.S. production of feedgrains and livestock products, which in turn, collapsed markets. In addition to high production losses from the drouth, excessive rains and insects, the income drop also reflects a decline in the value of farm production that was triggered mainly by lower prices received by farmers. Declining demand for exports and increased supplies available from competing exporting countries are major contributors to the lower prices.

According to USDA's September 1998 Agricultural Income and Finance report, the value of crop production from U.S. farms in 1998 is forecast to drop $7.9 billion, led by a $3.5 billion drop in sales of feed crops, mostly corn. Except for cotton prices, which are trending upward due to drouth and production shortages in Texas and the Southeast, the fall in value is mostly from significant price declines in most agricultural commodities.

The value of livestock production is forecast to be down $2.3 billion, led by a $4.3 billion drop in sales of meat animals. Cattle and hog prices declined this summer. Prices for broilers and dairy products, however, improved slightly.

In Texas, gross farm/ranch income, forecast at $16.6 billion for 1998, is now estimated at less than $14 billion, slightly below the 1996 level, which also reflected a severe drouth and cattle market collapse.

Farm Bill '96

This year's significant decline in prices for many crops has raised questions about policy tools for counteracting current low prices. While farmers now have complete flexibility to select when, where and what to plant under the Freedom to Farm concept, transition payments authorized under Farm Bill '96 are fixed and not related to prevailing market conditions.

Unlike income support payments under previous legislation which provided some price stability with supply management functions, Farm Bill '96 does not provide any price stabilizing features and transition payments are scheduled to terminate by 2002. The current law, however, provides two key tools — nonrecourse marketing assistance loans and loan deficiency payments — to provide assistance when commodity prices fall significantly.

With prices for corn and feedgrains dropping to below the loan rate, farmers are having to rely on these survival payments to make ends meet. But, how about the rest of the agricultural sector?

Congress is trying to pass a disaster assistance program to help soften these unusually difficult financial conditions in the production agricultural sector.

Disaster assistance

The House and Senate passed the agricultural appropriation bill this past week which includes $4.1 billion in disaster assistance to agricultural producers. The bill passed after a clause concerning RU-486, the French pill which chemically induces abortion, was deleted from the bill. While Congressional Democrats have expressed dissatisfaction with the amount of aid included in the bill, preferring a proposal backed by Sen. Tom Harkin of Iowa that included raising the commodity loan rates, the bill passed the Senate last Tuesday and was expected to be signed by the President as of this writing (Tuesday, October 6, 1998).

(Editor’s note: As most readers know, Clinton actually vetoed the entire agriculture appropriations package in an effort to strong-arm Congress into passing the Harkin proposal instead. Nevertheless, most of the following provisions are expected to survive in whatever compromise is reached. That compromise was still up in the air at presstime.)

Highlights of the bill include:

• $1.65 billion for direct payments to farmers with freedom to farm transition contracts.

• $1.5 billion for farmers suffering crop losses this year.

• $675 million for farmers with multiple-year crop losses.

• $175 million for livestock feed assistance in a cost-share program for producers who lost feed supplies this year due to natural disasters.

• Additional funds for existing farm credit programs, including an increase in farm operating loans.

• Raise the Step 2 cotton program "trigger" from $1.25 to three cents per pound. Step 2 covers financing user certificates. This change may make it slightly more difficult to trigger Step 3, which would open the border to imported cotton.

• A delay to 2005 for phasing out the use of methyl bromide; the phase-out was scheduled for 2001.

Bright side

After the cattle market collapse of 1996 and this past summer's market slump as a result of near record beef production, it appears that cattle prices have bottomed. The market is expected to improve this winter and into 1999. Fed cattle prices are expected to rise to maybe as high as the low 70's. An improvement in fed cattle prices will improve the market for all cattle. The sluggish economy and a large meat inventory may delay the improvement until late winter or early spring '99.

In addition, the Taxpayer Relief Act of 1997 and the IRS Restructuring and Reform Act of 1998 will provide some relief from federal income taxes. These acts lower the capital gains holding period to 12 months and lower the capital gains tax rate to 20 percent (10 percent for taxpayers in the 15 percent bracket). This change will help reduce taxes for agricultural producers, especially ranchers.

The acts also provide for additional flexibility to deal with income fluctuations, including using deferred payment contracts, income averaging, and deferring the gain on weather-related livestock sales. Estate taxes are lowered by both increasing the size of an estate that can be transferred tax-free and by enhancing provisions for installment payments and special use valued property.