WSJ article about current hard times in agriculture.
February 11, 1999
Outlook for Farm Economy Darkens
As More Prices of Commodities Fall
By SCOTT KILMAN
Staff Reporter of THE WALL STREET JOURNAL
CHICAGO -- The farm economy's problems are spreading, suggesting that
rural America is heading for a prolonged downturn and raising speculation that
farmers may seek another federal bailout.
Last year, as the Asian financial crisis doused that region's appetite for U.S.
farm goods, prices of wheat, corn and hogs collapsed, reducing incomes for
Midwest farmers. While prices of those commodities are still depressed, now
prices of Southern crops such as cotton, soybeans and rice are sinking. The
reasons range from global gluts to the devaluation of the Brazilian real. Even
Wisconsin dairy farmers, who reaped record high prices for raw milk last
year, are seeing their business sour.
"A lot is going wrong all at once," said Steven Elmore, an economist at Pioneer
Hi-Bred International Inc., the biggest U.S. seed company. "The whole
agriculture sector is a lot more stressed than last year."
Robert E. Young, co-director of the Food & Agricultural Policy Research
Institute at the University of Missouri, said he will likely reduce his forecast of
1999 farm profits by $800 million to $44 billion, which would be 8% lower
than the $48 billion earned last year and 18% lower than the record profits
generated by farmers just three years ago.
Although the agricultural downturn isn't taking much steam out of the national
economy, it is depressing the businesses that supply farmers with everything
from tractors to chemicals. Agriculture is also one of the nation's biggest
exporters and a drop in farm shipments worsens the U.S. trade deficit.
Congressional Debate Likely
Mr. Young's institute makes farm-economy forecasts for Congress, which last
year passed a $5.6 billion bailout package. His darkening outlook increases the
likelihood that some farm groups will approach Washington for another bailout
this year. If that happens, it would ignite a debate in Congress over whether to
stick to its plan for gradually weaning farmers from government subsidies by
2002. Opponents of the deregulatory 1996 farm bill would use such a request
as evidence that agriculture can't go it alone.
Some grain traders think Washington might even have to bring back planting
controls, a glut-busting tactic it gave up as part of the 1996 "Freedom to Farm"
bill. "I'm all for the free market but things are getting out of control," said
Richard A. Loewy, president of AgResource Co., a Chicago
commodity-research firm. "Soon we're going to be swimming in grain if the
government doesn't do something."
Without a second bailout, some economists expect to see a bigger drop in farm
numbers this year, something for which many in Congress have little stomach.
And as farm income and commodity prices fall, industries that cater to
agriculture are feeling the pain, too. Farm-equipment makers are cutting tractor
production again this year. Agco Corp., Atlanta, is reducing its production of
tractors and harvesting combines an additional 13%. That follows a 13% cut
by Agco in 1998, when its annual sales fell 8.8% to $2.94 billion. New Holland
NV, a maker of construction equipment and farm equipment with headquarters
in the Netherlands, expects industrywide unit tractor sales across North
America to drop as much as 15% this year. New Holland's 1998 revenue
declined 5% to $5.7 billion.
Tighter Credit
Meanwhile, farm bankers, hoping to avoid the mistakes that saddled them with
bad debts during the agricultural downturn of the 1980s, are moving to cull
weakened farmers. So may farmers are turning to the Agriculture Department
for loans that some government credit programs are being exhausted.
Cotton-industry officials said hundreds of growers in Texas can't get loans for
spring planting. Cotton prices have fallen to unprofitable levels for growers,
despite a drought that slashed production last year. Thanks to a string of big
overseas harvests, the globe is awash in cheap cotton. The world has a
six-month supply on hand, the biggest reserve in 13 years. As a result, the
price of the spot cotton-futures contract at the New York Cotton Exchange
has dropped 21% since October.
Some lenders are beginning to foreclose on Northern Plains wheat growers,
who have been battered by a string of poor harvests. In Minnesota, Kittson
County Sheriff Ray Hunt recently sold off the property of three farmers who
had lost their mortgages. "I don't like doing it but it's the law," said Mr. Hunt.
"I suspect I'll being doing more."
About 20 Kittson County farmers have quit voluntarily over the past several
months, according to local officials, even though the federal government
increased farm aid to the county by 50% last year.
Janet Olsonawski and her husband, both 49 years old, plan to auction off their
wheat and sugar-beet farming machinery in March. Discouraged by forecasts
for low crop prices, their 24-year-old son quit the family farm to design log
homes in Wyoming. The price of wheat has dropped 29% over the past two
years to a national average of $2.86 a bushel in January.
All this is a big change from just three years ago, when U.S. farmers were
cashing in on an export boom they thought would outlast the decade. Then the
Asian economic crisis killed the appetite of U.S. agriculture's single largest
customer, catching everybody from Iowa farmers to fertilizer companies and
grain millers in the middle of big expansion plans.
Hog farmers, who geared up to sell 10% more pigs in 1998, are now going
through their biggest shakeout ever. Economists expect tens of thousands to
quit the business this year.
U.S. grain farmers, who usually sell about one-third of their crops abroad, saw
the value of their corn exports drop 18% during the first 11 months of 1998,
compared with the similar 1997 period, according to the Agriculture
Department. Wheat exports fell 11%.
Now the shrinking value of Brazil's currency is undermining U.S. soybeans.
Brazil, a major soybean exporter, is preparing for a record harvest next month.
The currency move makes its crop far cheaper to foreign buyers than U.S.
soybeans. As a result, some grain traders expect the price of U.S. soybeans to
sink to the mid-$4-a-bushel range by summer if Midwest growing conditions
are good. That price would be the lowest for U.S. soybeans since the
mid-1980s farm crisis.
The commodity slump is hard to turn around without a big jump in foreign
demand, which doesn't appear likely anytime soon.
When demand drops, most manufacturers cut production or make something
else. But farming is made up of hundreds of thousands of small producers.
They all know output is too high, but each sees his best chance for recouping
last year's losses by producing more this year.
The upshot: Seed company surveys suggest that Midwest farmers are making
plans to plant almost as much of their land this spring to the same crops they
grew last year. If normal weather materializes this season, the U.S. could easily
produce bumper corn and soybean crops for the fourth year in a row.
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