High fuel and fertilizer hurt cotton, rice profits

Most of the 18 cotton and 16 rice farms included in a recent study are projected to lose significant net worth over the next four years resulting from high fuel and fertilizer expenses.

The baseline study of representative farms located across the U.S. was conducted by the Agricultural and Food Policy Center at Texas A&M University.

U.S. cotton and rice farms included in the study could see net worth decline by as much as 20 percent by 2009.

“We've never had such a large number of our representative farms with significant probability of losing net worth,” says Joe Outlaw, Texas Cooperative Extension policy specialist and center co-director. “Nine out of our 18 cotton farms have cash flow problems. It's so bad because of increased costs.”

Though the report projects smaller increases in fuel and fertilizer expenses for 2006 through 2008, it will not make up for previous increases in production costs — as much as a 50 percent hike in fuel prices over the last two years.

Additionally, many of the farms have carried over loans from one year to the next, Outlaw says. “And if you don't pay off that loan this year and you carry over and carry over until the next year, it all catches up.”

The study, recently presented to the House Agriculture Committee in Washington, represents farms located throughout the U.S. that produce wheat, rice, cotton, feed grains, cows and calves (or beef) and dairy. The study found the following:

Feed grain: Overall, seven of 20 feed grain farms were characterized in good financial condition and eight in moderate financial condition. Seven of the farms will be under severe cash flow stress and three have a high probability of losing net worth over the next four years.

Cotton: Three of the 18 cotton farms were characterized as being in good overall condition, with six farms characterized in moderate, and nine in poor condition. Half of the farms are projected to experience severe cash problems over the next four years. Six of the 18 cotton farms have more than a 50 percent chance of losing net worth.

Rice: One of the 16 rice farms is projected to be in good overall financial condition with three in moderate and 12 in poor condition. Thirteen of the rice farms are expected to face severe cash flow problems and 12 of the 16 have high probabilities of losing net worth.

Land prices

The report suggests land prices will not appreciate enough to offset losses due to higher operating costs, Outlaw says. Cotton and corn farmers, who experienced high commodity prices in 2003, quickly saw those prices erode in 2004 because of large supplies.

“Because there are no profits in these crops, we've gone back to the situation experienced in the 1960s and 1970s where we had a cost-price squeeze,” Outlaw says. “It's back to the future.”

The outlook is brighter for beef and dairy operations represented in the study since they are less dependent on fuel. Cheap grain and higher commodity prices for beef and milk have boosted profit projections.

For more information, visit the Agricultural and Food Policy Center Web site at http://www.afpc.tamu.edu.

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