Real Estate Values One Bright
Spot In Agricultural Outlook

By Colleen Schreiber

COLLEGE STATION — It was no surprise to hear an economist here last week outline a none too rosy picture for many agricultural commodities. The only real bright spot he could identify was land value.

Land value is the one asset base that is growing and allowing producers to maintain at least stable net worth.

That was the message delivered by Dr. Ed Smith, Extension economist for marketing and policy at College Station. He spoke to a group of 150 or so agricultural appraisers and real estate brokers at the recent ninth annual Outlook for Texas Rural Land Markets conference on the A&M campus.

Smith has been monitoring the financial impact on about 80 farms and ranches across the U.S. since 1982. The current outlook, the economist told listeners, is the most pessimistic since the initiation of the study — "even more pessimistic than the mid-1980s in terms of projections."

Cotton, Smith noted, took a substantial hit this past year in part because of the Asian economic crisis.

"Cotton producers cannot stay in the business with prices in the lower 50-cent range through 2001," he insisted. "They'll be forced to transition out.

He walked through an example of a cotton farm on the South Plains. This particular enterprise showed that 99 percent of the time under risk the farm would generate a negative cash flow.

"This farm is under liquidity pressure, meaning it has substantial cash flow problems," Smith explained. "Additionally, the probability of having to refinance remains above 40 percent through 2002."

On a positive note, the economist pointed out that the asset base is holding strong, therefore the probability of losing net worth in the short-term isn't substantial. He attributed the stable asset base to a strong real estate market.

"The old adage that you're dirt rich and cash poor is certainly showing up in this operation; it's a theme throughout all operations of this type," Smith said.

In fact, every cotton farm he monitors is in trouble in terms of liquidity.

"What we're saying is that these operations will not survive in their current setup if the price projections and inflation we're using as input costs are correct. We have a serious problem in the cotton industry."

The picture is almost as bleak for feed grain producers. Just like cotton, the feed grain sector is seeing considerable liquidity problems, Smith told the group.

"Never since we’ve been monitoring these farms have we had more than three or four feed grain farms in trouble. Now with $2 corn and $5 soybeans, all of them are under pressure."

Wheat, also off from last year, is expected to be in the $2.75 to $3.25 range.

Smith predicted that the depressed feed grain market will be the impetus for Congress to revisit current farm policy.

Rice doesn’t look great, he said, but better than feed grains.

The livestock sector is no different, except that Smith predicts producers will begin to see improvements as the cycle begins to shift. Hog producers who suffered through severe cash flow problems in 1998 are expected to see prices back in the $40 to $50 range, and by 2002 Smith expects six of the eight hog farms he monitors to have overcome their liquidity problems.

Smith monitors 22 dairy operations across the nation as well. The dairy sector, he noted, looks stronger but highly volatile, indicative of the type of risk all ag commodities are likely to experience under the current ag policy system.

"We saw the biggest fall in milk prices in history a couple of months ago," Smith told listeners. "We projected milk prices this time last year at $13.25. They jumped up as high as $15. What happened was that it got very hot in the southern states. It looked like supplies might be tight. Cheese demand was strong, drawing resources from butter, which made butter prices higher. Ice-cream and yogurt demand was strong and everyone panicked, and that drove prices up," Smith explained.

"Then we got rains, cheap feed grains made them more profitable, so prices plummeted."

Despite the volatility, Smith said he expects the trend toward larger and larger dairies to continue.

The ability to manage risk, he told listeners, is going to be a major issue facing production agriculture and the businesses that serve agriculture.

"The ag producer who has the least market power in the system will feel the impact of this volatility," he said.

Smith said he believes the number one problem Congress will face this year is how to deal with the inherent risk to which agriculture is exposed.

"Congress doesn’t like to fund these ad hoc disaster programs, even though they’ve done it for 11 of the last 15 years, but they'll likely do it for the next 11 years if we have the current ag policy system. Why? Because agriculture in the U.S. has been built over the past 70 years on this political objective — to err on the long side of production.

"The policy has been put into place that in the United States we will support the technology, the research, the farm programs, the incentives to make sure that we have a cheap food supply in this country," Smith continued. "And they’ve consistently met that objective."

One way that objective has been met, he said, is by not concentrating agriculture in this country in any one growing region.

"We've dispersed agriculture over the 48 contiguous states. We put subsidized water in the West; we’ve had disaster programs that allowed crop agriculture to build in the South and the Southeast, etc., all with the intention that dispersed agriculture was the best for the country."

Though the country has moved to a more market-oriented farm program, Smith insisted the political agenda — to have cheap food by dispersing agriculture — has not changed.

"A market-oriented economy says we shouldn't be growing corn in Texas," Smith told listeners. "We can grow all the

the corn we need in the Cornbelt.

The private sector has to realize the inherent risk of mother nature," he continued, "and if we want the objective of dispersed agriculture, then there’s got to be government involvement. If you want corn in Texas in a higher risk area, then you’re going to have to give producers in that region the ability to mitigate the risk given these cheap prices. Crop insurance programs won’t cut it."

U.S. farmers and ranchers have the ability to outproduce domestic demand by 40 percent, Smith noted. That means foreign markets have to consume that excess, and of late the crisis abroad has left U.S. producers in a pinch.

"The big question of the future is how do we give farmers and ranchers the tools to analyze how to position themselves for the future, and then with crop or livestock insurance, how do we mitigate the downside of risk without taking away the upside opportunity? That’s the challenge that will be facing the crop side," Smith told the group.

In summary, he reiterated that all crop sectors he monitors are under severe cash flow pressure.

"From an equity side, we're not seeing what we saw in the mid 1980s, and until we see a depreciation in real estate we are not expecting to. But from the cash flow standpoint, all of agriculture is under considerable pressure. If they're going to stay in business, some changes have to be made in ag policy. You can’t have this free market agriculture, you can’t have that objective, and not subsidize production agriculture and maintain a cheap food supply in the U.S. We would like to design an ag program, however, that wouldn’t support the inefficient producer."