Concerns For Agriculture's
Financial Health Mounting

By Jose G. Peña
Extension economist

On October 22, President Clinton signed the $69 billion fiscal 2000 agriculture spending bill that includes about $8.7 billion in emergency aid for farmers. While this assistance package will help the agricultural income situation, the agricultural outlook in the near term remains cloudy. This is the second year in a row that Congress was compelled to provide emergency relief for farmers and ranchers.

With more than one-third of this year's net farm income coming in the form of government payments, the government remains clearly committed to providing assistance to the agricultural sector, but it also appears that it is getting harder for Congress to pass disaster assistance bills. This is especially true when the general public receives reports that agricultural income has not dropped dramatically, in spite of continued reports of an impending financial crisis in agriculture.

Even with this year's very low commodity prices, net farm income for 1999 is forecast at $50.5 billion, $6.4 billion higher than the revised estimate for 1998 of $44.1 billion. Direct government payments, an important component of farm income this year, are forecast at $22.5 billion, the highest in history. The previous high was $16.7 billion in 1987. Loan deficiency payments and a supplemental AMTA payment account for the majority of the increase in payments over 1998.

Crop agriculture hardest hit

While net farm income has not decreased, the problem with relying on net farm income as an indicator of financial health in agriculture is that the profile of income is quite segmented. While prices for beef cattle and other livestock products improved in 1999 and the future appears relatively bright, reductions in 1999 income will fall most heavily on crop agriculture, and the outlook remains clouded.

Abundant crop production and a depressed global economy contributed to weak markets in 1999 and it appears that a significant market recovery will be slow, perhaps beyond 2002. Producers of the major grain crops, cotton, and hogs received prices far below the cost of production in 1999, and while a slight recovery is expected in 2000, crop prices will likely continue to be low for the next two seasons. Low farm prices are a result of too much supply and too little demand.

After near-record high prices for a relatively significant proportion of agricultural commodities in the 1995-96 period, Texas crop producers have seen prices for the commodities that they produce fall to rock bottom levels. This year's low prices came on the heels of two major drouths in three years and, while most of Texas received timely spring rains and yields were good, weak markets perpetuated reduced income. Late summer and fall rains have failed to materialize, and most of Texas is going into the winter with below average moisture conditions. Prospects for continued low crop prices for the year 2000 likely will force a number of farmers to seek alternative income sources in the future.

Farm payments will reduce debt

Many farmers will use additional government payments to reduce financial exposure by paying down debt. In analyzing farming practices that support successful small farms, USDA's Economic Research Service recently completed a study which focused on small-scale farms (sales under $250,000) where farming is the primary occupation of the operator, ranking the farms' success by returns to assets.

Top-performing small farms are characterized by their successful application of three critical management strategies: using production strategies that control costs, actively marketing their products, and adopting effective financial strategies. Controlling variable, fixed, or economic costs (which provide a return to the unpaid labor, machinery, equipment and other assets used in production) is a main feature of top-performing farms. Controlling inputs leads to lower costs per unit of output and thus to higher profits per unit of output. Keeping fixed costs (such as mortgage payments or equipment costs) low by renting land or machinery permits flexibility when market conditions vary.

Production strategies differed between operators of top-performing small farms and operators of other small farms in the study groups. In addition to keeping an eye on traditional production costs, producers in the top 25 percent group reported greater use of forward pricing of inputs, diversification into additional crop or livestock enterprises, as well as renting land (particularly share renting) than did the less successful farmers. Farmers in the top 25 percent also were more likely to allocate some of their labor to off-farm work.