High fuel, fertilizer prices result in negative net worth for farms

High fuel and fertilizer prices continue to decrease the economic viability of farms represented in a baseline study released recently by the Agricultural and Food Policy Center at Texas A&M University in College Station.

Farmers experienced as much as a 28 percent hike in fuel input costs in 2005, which also increased the likelihood of negative net cash flows, according to the report.

Commodity price increases projected through 2010 won't be enough to offset increased input costs, said James Richardson, study co-author.

“The high price of fuel and fertilizer has played a significant (role) in net returns to farmers,” Richardson said. “This will cause many farmers across the country to look for new ways to cut costs while maintaining yields.”

Most cotton and rice operations included in the study will experience negative cash flows over the next five years, due to continued low prices and the high price of energy for irrigation and fuel to run machinery.

The report, presented to both the U.S. House and Senate agriculture committees, includes 66 crop farms, 23 dairies and 13 cattle ranches in major producing areas of 28 states.

Of the 20 cotton farms, 18 operations were projected to experience severe cash flow problems in the next five years.

“A lot of this is contributed to the cost of irrigation,” said Joe Outlaw, study co-author. “It just keeps going up. Even the dryland farms are having a hard time making it. Although cotton prices are increasing a bit, the increase is not enough to offset the large rise in input costs.”

Rice farms are facing an even bleaker outlook, Richardson said.

“They're facing some difficult challenges,” he said. “Part of it is the price of rice is just not likely to exceed the target price. As with cotton, rice is a high input crop. It costs money to pump water and irrigate. And rice takes a lot of fertilizer as well. The price projections for rice are mostly flat, which won't help offset these high input costs.”

The cost of land is also contributing to net worth decline, Richardson said. Producers who have land debt, or are paying cash rent, are in a “cost-squeeze” because of increasing interest rates and rising rental rates, he said.

The outlook for the cow-calf and dairy operations is stronger due to recent favorable prices for cattle and milk, Outlaw said. However, beef cattle prices are expected to decrease moderately, in part due to cattle herd expansion nationally.

Dairy operations represented in the study are projected to see moderate decreases in net returns as recent high milk prices will come down to more modest levels, the report indicated.

By commodity, the study found the following projected impacts on economic viability during 2006-2010:

Feed grain farms: Three of the 18 feed grain farms were in good overall financial condition. Six were considered to be in marginal condition, and nine in poor condition.

Wheat farms: Four of the 13 wheat farms were classified in good financial condition, one marginal, and eight in poor condition.

Cotton farms: One of the 20 cotton farms was classified in good condition, one in moderate condition, and 18 in poor condition. Also, 18 of the farms have more than a 50 percent chance of losing net worth by 2010.

Dairy farms: Thirteen of the 23 dairy farms are in good overall financial condition. Four are considered to be in marginal condition, and six in poor condition.

Beef cattle ranches: Six of the 13 cattle ranches were classified in good financial condition, two classified marginal, and five projected in poor condition.

The full report is available at http://www.afpc.tamu.edu.

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