Economist sees reason for concern in ag economy, but he’s not prepared to hit the panic button

Economist sees reason for concern in ag economy, but he’s not prepared to hit the panic button

Concerning economic indicators apparent in agriculture should be reason for caution but not for panic, says Oklahoma State University agricultural economist.

U.S. farmers, beset mostly by forces beyond their control, have taken hard hits to their finances over the past three years. From 2013 to 2015, net farm income dropped by 53 percent, down from $123.7 billion to an estimated $58.3 billion. A one-year drop of 36 percent occurred from 2013 to 2014, when net farm income dipped to $91 billion.

“These are concerning indicators,” says Rodney Jones, Oklahoma State University Farm Credit Chair, Department of Agricultural Economics. He told participants at the recent Rural Economic Outlook Conference in Stillwater that other indicators also are of concern for the agriculture sector.

“Debt held by U.S. farmers in 2015, expressed in proportion to net income, is estimated at 6.3 to 1. In recent years, it has been 4 to 1. We have to go all the way back to the 1980s to find another 6 to 1.” That was an “early warning sign” of the 1980 financial crisis, Jones says. “We started to see that crisis evolving in about 1977, with a debt-to-income ratio of around 5 to 1. But that’s only one indicator for caution.

“On the other hand,” he says, in typical economist fashion, “farm balance sheets remain strong. Debt to equity is at 15 percent. It was around 20 percent in the late 1970s, and peaked at 28 percent in 1985.”

Now is not then. “We see dramatic differences,” he says. “Interest rates are now much lower, and aren’t projected to go anywhere near the high rates of the 1970s and ‘80s.”

OTHER ECONOMIES STRUGGLING

But, global issues offer cause for concern, Jones says. “Economic sluggishness in countries such as China and Brazil will continue to ripple through the rest of the world, including the United States, and drag the economy down. A strong dollar makes it even tougher to compete for export business. Other economies are also struggling.”

Closer to home, farmers and ranchers see mixed enterprise prospects. On one hand, cow/calf operations are still strong, with calf prices holding up, even with some recent softening of the market. “Cow/calf operations are still enjoying profits,” he says, including some diversified farms with cattle and crops.

“We have a tremendous number of diversified farms with crops and cow/calf operations,”

Jones says, but the last few years have been especially tough on crop production. “We’ve seen severe drought, but also higher prices until recently. We also had good crop insurance guarantees, and net profits remained generally good. We saw no widespread concern. In 2013, cattle prices took off. In 2014 cattlemen were ecstatic. And it’s still good. And crop farmers still have good crop insurance guarantees.”

He says the 2014/15 wheat crop took a hard blow and relied on crop insurance. “We were stung, but not too badly. We see no widespread concern of financial stress.”

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MARGINS TIGHTENING

Issues remain, however. “The breakeven yield for wheat planted in summer and fall 2015 is about 45 bushels per acre,” Jones says. That’s significantly higher than state average. “That’s a tight margin — and it’s hard to make money.”

Grain sorghum profit margin is also tightening. “The sugarcane aphid makes it harder to pencil in a profit on grain sorghum. Control programs are running $25, $30, even $50 per acre in additional costs.”

For the past few years, he says, summer crops have been able to bail out losses from winter wheat. But, drought, increased production costs, and lower prices have combined to limit how much those enterprises can offset wheat shortfalls.

“I see a little reason for concern with multiple years of production losses, low prices, lingering drought, and a bit of easing off for cattle prices,” Jones says. “But I don’t see reason to panic.”

Caution is called for. He recommends producers pay attention to the bottom line. “Manage cash flow,” he says. “Manage assets, and manage liabilities.”

He says lenders will be looking closely at producers’ management expertise as they scrutinize loan applications for the next crop year.

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