Agriculture's general strength could help cushion nation's financial woes

With the House voting against a proposed $700 billion Wall Street bailout on Monday, a new financial analysis by the American Farm Bureau Federation found that the nation's agricultural sector is in good financial condition at the farm level.

That could serve to cushion the impact of the financial crisis, said Terry Francl, American Farm Bureau Federation economist.

The analysis found that, while the overall U.S. agricultural balance sheet is very strong, the situation varies among individual farmers and ranchers.

Another expert, Bruce Johnson, a University of Nebraska-Lincoln agriculture economist, said combining gains among crop producers with potential losses among the livestock sector should still result in a gain for Nebraska farm income.

"The fallout from the general financial malaise is being felt worldwide, especially in countries that may be already facing slowing economies due to the high price of energy," said Francl, one of the authors of the analysis.

He said that will most likely moderate the demand for agricultural products and ingredients, reduce the demand for U.S. agricultural exports and ultimately affect U.S. farm prices. Likewise, Francl said, a slower domestic economy would also weigh on the demand for farm commodities and prices.

Rob Robertson, vice president/governmental relations for the Nebraska Farm Bureau, said state farmers and ranchers could feel the impact of the nation's financial blues next year. That would be even more likely if access to credit becomes tighter and input costs -- such as fuel, fertilizer and seed -- continue to soar.

Also, Robertson said that, if commodity prices take a nose dive because of the current financial turmoil, that would be devastating to producers, especially with input costs going up.

The state's livestock industry is feeling the financial impact of higher grain costs, Robertson said, which could translate into higher meat costs at the supermarket.

And consumers feeling the pocketbook pinch of economic uncertainty could drastically cut back on buying meat for the dinner table.

"That would definitely impact Nebraska," Robertson said.

Francl indicated that the U.S. Department of Agriculture is projecting record-high farm income in 2008. Another measure of economic health in farm country, debt-to-asset ratio, is at a modern low of 10 percent.

Earlier this month, Johnson predicted that 2008 will be the most profitable year ever for the state's crop producers. He estimated that revenues will result in a $1.5 billion increase in that sector's net farm income.

Most of that increase is the result of higher grain prices. But because feed grain is a major expense for livestock producers, higher costs could result in a $750 million reduction in net earnings compared to 2007, Johnson said.

Combining the livestock loss with the crop gain, Johnson forecasts an overall $750 million increase in total net farm income for the state, a 21 percent hike.

Francl said the American Farm Bureau Federation analysis found that, within the United States, the credit supply is being impaired, which affects the cost of credit. He said this crunch is already affecting some agribusiness companies, as reflected by recent developments in the fertilizer sector.

"Fertilizer prices have basically doubled in the past two years and continue to rise," Francl said.

He said farmers are currently being asked to make commitments for their 2009 fertilizer needs and to pay a substantial portion of that commitment, sometimes 100 percent, up front.

"The credit function of these transactions is being shifted from the fertilizer producers and retail dealers to the farmers," Francl said. "The net result is that it increases the farmers' cost."

Also, he said, farmers' commodity sales to elevators and processors, such as ethanol plants, are being impacted by the financial problems facing the nation.

Francl said farmers are not being asked to provide more credit but are being offered a lower price for their crops, generally due to the higher "basis," which is the difference between the futures price and the local cash price.

"The net impact of either the higher cost or lower prices is the same -- less income for farmers," Francl said.

He said there are many factors other than just credit availability affecting the returns to U.S. agriculture, "but the current financial instability simply serves to exacerbate the already volatile input/output price situation."

"So the sooner action can be taken to stabilize the credit market, the better it will be for agriculture and the country as a whole," he said.



On the Web

The full analysis can be accessed at http://www.fb.org/newsroom/nr/nr2008/09-26-08/SpecialFinancialAnalysis_9-25-08.pdf