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The 1996 Farm Bill -- International Commodity Markets -- Integrated Farm Input Markets -- The Drought. Take your pick!
 

Each of these are contributing to changes in Georgia agriculture. What some called "the silent farm financial crisis of 1997" has expanded to more visible financial problems.
 

The current farm situation is different from the one in the mid-1980's. That situation had cash flow shortages accompanied by falling land prices. Farm debt in 1985 was $5 billion, up from $1 billion fifteen years earlier. Approximately one-half of the 1985 non-real estate debt was held by the Farmers Home Administration, the lender of last resort.
 

Currently, we're experiencing generally strong land prices. The 1996 reported-by-USDA Georgia farm debt was $3.3 billion -- compared with $2.7 billion in 1991 and $3.1 billion in 1989.
 

The distribution of current debt is not determined. Information available from the state's commercial banks, Farm Credit and the Farm Service Agency show the current farm debt held by these three institutions to be $2.9 billion, with banks holding 49.2% of this figure, Farm Credit 43.3% and the Farm Service Agency 7.5%. But there are other sources of farm credit, particularly farm input supply firms. There are reports of bank credit cards being used to finance some farm operations. These other sources obviously increase the total loans outstanding to near the amount reported by USDA.
 

But if debt is relatively steady, and if land prices are strong, why the concerns over the financial health of the farming industry?
 

Georgia has approximately 43,000 farms. Census data show approximately 10,000 of these are commercial farms (those with more than $50,000 annual gross income). Earlier surveys have also shown the smaller farm operators have little current debt. As the majority of this debt is held by larger commercial farm operators, this means some of these operators have high levels of debt.
 

While these larger operations have the potential to generate larger revenues, they also have more debt to service. They also have the potential for cash flow problems in the event of depressed commodity markets and/or unfavorable weather.
 

The '96 farm bill severed the link between income support payments and farm prices by providing annual fixed, but declining payments through the year 2002. Crop producers received strong market prices for their 1996 crop while also receiving the market transition payments.
 

But provisions of the bill is a sword with two edges. Current market prices have declined to the point near the production cost level for many producers. While the transition payments are still in effect, producers faced the problem of deciding what crop to grow with no one crop showing a strong economic advantage. Only peanuts and tobacco showed a positive cash flow projection for many of the state's growers fortunate to have a quota or base.
 

Georgia (and U.S. farmers) are a victim of their own efficiency. Mechanization, new varieties, improved cultural practices (specifically irrigation) have increased production of basic foodstuffs faster than the domestic demand. The result is a surplus that is dependent on the world market to consume. Further, an excess of farm commodities usually results in declining market prices. "A shortage is priceless and a surplus is worthless", according to one economist describing the supply-demand of farm goods.
 

A comparison of annual farm prices in the state and estimated production costs of selected commodities are shown below.
 
 

Table 1. Annual Prices Received and  Estimated Dryland Production Costs per Unit, Selected Crops, Georgia
		Annual Prices Received			Estimated Production Costs *
Crop	Unit	1995	1996	1997	1995	1996	1997	1998
Corn	Bu.	$3.55	$3.58	$2.90	$2.91	$3.14	$3.30	$3.39
Wheat	Bu.	3.39	4.38	3.20	3.70	4.02	4.21	4.31
Soybeans	Bu.	6.71	6.87	6.75	5.70	6.27	6.21	6.57
Cotton	Lb.	0.77	0.71	0.70	0.58	0.60	0.62	0.63

NOTE: Cost estimates are from annual estimates by the Georgia Cooperative Extension Service.

They include variable and fixed production costs, exclusive of land charges.
 

* With Normal Yields.

These figures show that many producers of these crops in the state have experienced a price - cost squeeze during the past eighteen months. All of the crops except soybeans, have traditionally had price links associated with production costs, rather than with national and international markets. Agricultural markets, for decades prior to the 1970's, were perceived as being relatively stable.
 

While growers have been facing this price-cost dilemma, the market for capital items -- particularly farm machinery was experiencing higher prices.
 

These prices have increased 3-5% annually in recent years. Given the magnitude of high prices, these high cost items quickly get larger within a few years. Prices of selected equipment are shown below.
 
 

Table 2. U.S. Average Prices Paid for  Selected Farm Machinery Items
Item	1996	1997	1998
Tractor, 200-280 hp	$100,000	$111,000	$116,000
Tractor, 140-159 hp	71,500	74,800	77,1000
Tractor, 70-89 hp	30,900	31,800	32,800
Planter, 8-row	24,400	25,800	25,700
Chisel Plow, 16-20 ft.	10,300	11,300	11,700
Combine, large capacity	137,000	135,000	140,000
Cotton Picker, 4-row	192,000	195,000	198,000

Source: Doanes Agricultural Report, 5/15/98
 
 

Many of the state's crop farmers increased their cotton acreage during the past 3-4 years. This proved successful during the early years of the switch due to strong cotton prices. But recent cotton price declines (and other crops price declines) placed these growers in a precarious financial situation. And when we consider these higher machinery prices, the problem is compounded. Many growers are barely covering cash production costs while at the same time facing higher equipment replacement costs. What was the reaction?
 
 

When farm commodities are plentiful, prices are relatively low. Farmers frequently have seen the need to expand in order to generate adequate revenue.
 

Much of this is accomplished by renting additional cropland. But in this situation, growers often bid against each other for land, forcing up land costs to the point that some of the fixed costs of production are not covered. Also, some of the growers have excess machinery capacity (and accompanying higher annual payments), further accelerating land rental bidding.
 

Irrigated cropland with a high production potential has rented from $150-$200 per acre annually in recent years. If we look at a 1,000 pound expected cotton yield on this land, the grower is incurring land costs of $0.15-$0.20 per pound before any production practices are begun.
 

But getting larger is a fact of life in today's society. Most major sectors of our economy are concentrating. From retail stores, to health care, to banks, to airlines -- we're seeing fewer and larger organizations, mergers and buyouts.
 

One concern from the concentration of farmers is the higher risk they encounter as they become more leveraged.
 

Most of the attention is being given to row-crop farmers, particularly in the southern portion of the state. The 1997 drought -- the excess rains of last fall and winter -- and now the current drought has caused a focus on those most affected by the weather. We know last year's yields were drought-reduced, and then the fall rains prevented some from harvesting what was produced. Some bills were probably not paid.
 

But Georgia agriculture is a comprehensive industry. Annual estimates by County Extension Agents place 1996 farm gate income at $7.4 billion. The 1997 income figure will be near this amount. Thirty-three percent of this is the value of broilers. While broiler growers receive a relatively small amount of this, the broiler industry supports many related production and processing jobs. While the majority of this production is in the northern half of the state, it is becoming more common below the "fall line".
 

Further, all livestock contributed 8% of the total reported farm gate income. Beef producers are distributed statewide, but stand to face financial problems should pastures and/or hay supplies become limited.
 
 
 

Table 3.

In addition to broilers, there is poultry income from eggs and other related ventures. In total, poultry income constitutes 39% of total farm gate income, as we count the value of the dressed birds as being farm gate income.
 

The farm policy scene has been relatively quiet in the two years since the 1996 farm law was passed. The idea of getting the government out of agriculture seemed to be working as long as the weather cooperated and most major farm commodity prices were strong.
 

But the calm has been broken to some extent as the National Commission on Small Farms was established and charged with looking into the status of the nation's smaller farms and proposing a "National Strategy" relative to them. The commission's report deplores the high concentration in much of the marketing system, but only suggested ways of circumventing this concentration rather than solutions. The Secretary of Agriculture was admonished to give more consideration to small farms.
 

Recently the biweekly newsletter, The Kiplinger Agriculture Newsletter expressed concern about the financial health of U.S. agriculture. In the July 2, 1998 issue, we read:
 

"There's a growing discontent among the ranks of U. S. Farmers. Many have misgivings about the recent changes in farm policy.
 

Most of the dissent comes from the Great Plains. This area composes 11 states where 58% of its counties are deemed farm dependent (farming contributes 20% or more of a county's labor and income). Grains and cattle are the major enterprises.
 

Dependence on direct commodity payments is high there. Over 30% of gross farm income originates from direct government payments.
 

Farm level prices are down or headed down. This is in contrast to conditions in '96 when the FAIR Act was adopted and prices and income in the area were relatively favorable.
 

Plains farmers are being pinched by poor returns. Some will fail
 

Several lawmakers are seeking relief. But Congress is not inclined to tinker with the new law. A "wait-and-see" attitude is most likely. Many cite the cyclical nature of farming, and say any payments made to farmers under the '96 law exceed deficiency payments farmers would have received under the old program".
 

Every few years we hear the statement "agriculture is at a crossroads". The present appears to be another junction. And much of the Southern U.S. is in the throes of dry weather.
 

If the current farm bill is not modified before it expires in 2002 -- and if this type of legislation stays in place, or is eliminated effective in 2003 -- then the current situations will likely be extended. Farms will get larger and farm operators will be subjected to more risk -- weather, price, environmental and legal risks.
 

Continuing uncertainty about the future of two of the state's most profitable crops -- tobacco and peanuts is a dominant topic of concern in Georgia. Elimination of these two programs would cause a major shift of resources. Political uncertainty about the future of these two crops may overshadow price and yield risk in production and capital investment decisions.
 

The tobacco program we have known for years will likely be changed. The hostile attitude toward the industry will affect demand for tobacco products. Any major change in the program will most likely see producers look for ways to become more efficient and for alternative means of marketing their crop.
 

The peanut program will likely have changes as the current farm law expires. We can't accurately predict these changes, but lower support prices and/or lower quotas will affect the well being of many farm operations.
 

One group of farm enterprises that has grown in recent years is vegetables. Current estimates place income from all vegetables at $326 million, ranking it fifth among individual enterprise income in the state. But there is a limit to the amount of vegetables that can be consumed at prices acceptable to consumers and that will provide a profit for producers. This category of income cannot replace large amounts of other lost income.
 

Broiler production will likely expand in the future. But this expansion involves large capital outlays, and takes place in a more deliberate manner (as opposed to shifting crops from year to year). And there are many locally grown commodities that occupy niche markets. Again, these commodities don't offer large adjustment opportunities.
 

Georgia has 17 counties where agricultural income composes 20% or more of total income. This is 11% of all counties.

Broiler production is concentrated in the northern portions of the state (see table 4). This production will likely continue but may face environmental restrictions for expansion. Other agricultural production takes place in these areas but is a minor portion of total output.
 

The southern half of the state gets most of its farm income from row crops, vegetables and forestry. Any major change in this farming pattern will affect not only farmers but farm supply firms, rural economies and local governments.
 
 

Georgia's Advantage for Cotton ?
 

Some have suggested that the increased planting flexibility of the '96 farm bill will further stimulate the movement of cotton back to the Southeast. With boll weevil eradication, much of this area has a competitive advantage in cotton production. A cotton base-building era occurred here prior to the 1996 Fair Act. Now, regions with high cost cotton, such as parts of the Southern Plains, may shift to other crops, further enhancing cotton production in the Southeast.
 
 

Farm Profits Affects Land Values
 

Current farm land and land attachments constitute a significant part of county tax bases in nine of the state's twelve development regions (table 5). One county in Southwest Georgia has 70% of its tax base in farm assets. Any loss of farm income will affect the profitability of land, and, not only affect the individual's ability to pay taxes, but the basis for taxation. The major weather related income assistance currently available is either crop insurance, or low interest loans for disaster declared areas. But loans do little to help those with large amounts of debt. Other assistance is feed for livestock operations where farm grown feed is lost.
 

The profitability of farming has widespread implications. Both political and economic factors affect this well being. A survey of Georgia County Extension Agents (75 out of 159 responding) indicated 214 farm production units in Georgia went out of business between the fall of 1997 and the 1998 planting season. More likely went out of business in the non-respondent counties. While this is a small percentage of the total operating units, it is indicative of the trend toward a smaller number of farms. It is imperative that all concerned be aware of all courses of actions and the expected results of these alternatives.
 
 

Table 4. Total Estimated Farm Gate Income, Georgia, by Development Region
Development Region	Farm Gate Income ($000)	Major Contributor(s) and percentages
One- (N'west)	643,462	Broilers(69%); Forestry(4%)
Two- (N'East)	1,137,958	Broilers(70%); Layers(4%)
Three- (Atl)	157,555	Broilers(35%); Nursery - G'house(22%)
Four- (W'Cent)	217,244	Broilers(44%); Forestry(18%); Beef(9%)
Five- (Athens)	773,493	Broilers(60%); Forestry(6%); Dairy(5%)
Six- (Macon)	240,474	Dairy(15%); Cotton(14%)
Seven- (Augusta)	357,296	Forestry(27%); Cotton(15%); Nursery(8%)
Eight- (Columbus)	550,031	Cotton(23%); Broilers(19%); Peanuts(15%)
Nine- (Dublin)	603,310	Cotton(22%); Forestry (17%); Tobacco(7%)
Ten- (S'West)	1,221,887	Cotton(27%); Peanuts(15%); Vegetables(13%)
Eleven- (S'Cent)	1,033,274	Cotton(16%); Forestry(13%); Vegetables(12%)
Twelve- (S'East)	490,270	Forestry(18%); Vegetables(15%); Cotton(10%)
Total	7,426,254

Source: 1996 Georgia Farm Income Survey, estimates by County Extension Agents.
 

Table 5. Total Agricultural Tax Digest as a Percent of Net Maintenance & Operations Digest, Georgia, by Development Region
Development Region	Tax Digest as Percent of Maintenance & Operation Digest	Range
One- (N'West)	12.4	3.1 - 26.8
Two- (N'East)	11.0	4.2 - 50.1
Three- (Atl)	0.8	.0 - 7.8
Four- (W'Cent)	12.3	6.5 - 35.5
Five- (Athens)	16.4	0.5 - 32.9
Six- (Macon)	6.3	1.2 - 31.2
Seven- (Augusta)	6.8	1.0 - 52.6
Eight- (Columbus)	16.4	4.1 - 60.7
Nine- (Dublin)	19.0	8.9 - 49.6
Ten- (S'West)	21.1	2.8 - 70.5
Eleven- (S'Cent)	19.8	5.9 - 59.3
Twelve- (S' East)	5.2	.0 - 35.7

Source: Bureau of Economic Analysis, U. S. Department of Commerce

Note: Tax digest is 40% of assessment value of property.

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