... Low Commodity Prices

... Multi-Year Adverse Weather

... Urban Pressures

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Most of the current media depicts farming as an industry getting smaller and a continual movement toward a bi-modal distribution of a large number of small farms and a smaller number of large farms. Decreasing is the number of medium-size farms (table 1). 

And this is being done on lesser amounts of farmland. Currently about 30% of the states land area is in farms, compared with 47% in 1970.

Much of this land change occurred during the 1980's, a period of farm economic problems, but the potential for further farmland removal is always present during times of financial stress.
 

Table 1. Number of Georgia Farms by Economic Class, 1992 - 1999
	Economic Sales Class
Year	$1,000 - $9,999	$10,000 - $99,999	$100,000+
1992	26,300	12,900	6,800
1993	30,900	11,200	6,900
1994	31,500	10,500	7,000
1995	31,900	10,000	7,100
1996	32,000	9,700	7,300
1997	31,900	9,600	7,500
1998	32,500	9,700	7,800
1999	32,600	9,700	7,700
2000	32,600	9,900	7,500

Source: GASS - USDA
 

Farm cash receipts in Georgia have declined since 1997 (figure 1). Both crop and poultry receipts have dropped. The poultry industry is vertically integrated, meaning the final output is determined by the poultry integrators and most of the poultry cash receipts are reported by these firms. 

Crop receipts go to the many farm operators who produce these commodities. The market prices of most basic farm commodities covered by federal farm legislation have declined during the past 3-4 years, initiating higher government payments to compensate for lower prices. In addition, tobacco farmers have had quota reductions of 45% since 1997. The percent change in cash receipts of the major crops in Georgia since 1997 are shown in figure 2. Cash receipts from vegetables (aggregate vegetables) is the only crop classification to show an increase in receipts over this time span.

Crop receipts currently make up about 35% of total farm cash receipts in the state, down from earlier percentages as high as 45%. Thus, a reduction in crop receipts significantly affects the well being of the state's farmers. Farm lenders tell us many farm operating loans are repaid with money received in the form of federal payments. And the concern in the industry is that many of these payments are annual appropriations as opposed to annual programs legislated in the 1996 farm bill.

Further, this dilemma is commonplace on crop farms across the U.S. Last fiscal year(2000), federal government payments to farmers totaled $32 billion - a record amount - this coming while we are operating under a farm bill that was designed to remove the government from agriculture.
 

While cash receipts are important to the economic activity in rural areas, the most important factor to farmers is the profitability of the enterprises produced. Current aggregate data does not indicate the profitability of the individual enterprises. 

Most all farms have different degrees of efficiency and, in turn, profitability. To indicate the lack of profit - and the importance of government programs - data in table 2 shows the estimated yields needed to break even for several crop enterprises in Georgia given the average 2000 market price - and these crops grown using 2001 estimated production costs.

But low crop prices do not affect everyone adversely. Cheap feed boosts profits of those who feed animals - and the poultry industry is a major part of Georgia agriculture. 

Further, consumers enjoy a reliable, inexpensive supply of food. Government farm payments help farmers stay in business - but they also benefit the entire population by helping preserve our source of relatively inexpensive food. Today, only about 11% of our national disposable income is spent on food -- the lowest percentage of any developed nation.

Table 3 helps show the dilemma crop farmers face when compared with the yields needed to break even in table 2. The average price of the past few years has been below the break-even price - with the exception of peanuts and tobacco - which still are grown under production quotas and support prices.

Looking at more recent data, average prices received by U.S. farmers fell 9.5% in October, 2001, the largest monthly decline in history. The previous record one-month drop occurred in September, 1973.

Crop prices fell 14% in October. Soybeans were down $0.43 per bushel from September, and corn fell by an average of $0.12. Cotton averaged $0.344 per lb., the lowest level since March 1975.

It should be recognized that government payments to farmers are not disbursed at random. They represent federal legislation that has existed for sixty years that help to preserve our nation's farms, and in turn, our food supply. They are designed to supplement farm income when commodity prices drop to the extent that farmers are losing money. And, it should be kept in mind that farming cannot be turned off-and-on like an industrial factory. The production process involves months and years for various commodities. World events can cause the commodity prices to drop after the production process has begun, creating farm cash flow shortages.

Aggregate farm profit shown by GASS cannot be broken down by enterprise, but the profits of most program crops are low, or non-existent.

Date from the Bureau of Economic Analysis indicates the profit without government payments is reduced by about one-half in some parts of the state - especially the middle portion of Georgia (west, central and east districts) where few crops with quotas and price supports are grown (table 4).

The north district is least affected by government payments as row crops here are grown only in a few counties. 

The cash flow problems with Georgia farmers is not unique to this state. Farm business management records in other states indicate profit on many crop farms would have been negative in recent years without government programs. 

World production of many of the grains, oilseeds and cotton is greater than the market will absorb at profit-level prices. The 1996 farm bill was passed at a time when world prices of these commodities were at level to afford profits. But recessions in some major importing countries plus an increase in acreages in other countries shifted the supply/demand equilibrium. The '96 bill apparently assumed these strong prices were permanent fixtures. Consequently, it removed commodity price supports and lowered the marketing loan levels.

We were not aware of how commodity prices would gyrate in a free market. The free market is a brutal market for any business and this generation of farmers and their associated businesses has never experienced this type situation.

Although the 1996 farm bill is in effect through 2002, Congress has begun work on a new farm bill. The version passed by the House of Representatives would be a 10-year bill that included options for target prices for program crops and included a host of other crops. This type legislation would be relatively expensive and is opposed by the current administration.

The Senate Agriculture Committee has passed a draft bill that would include counter cyclical payments but would shift some funds from commodity programs to conservation programs. Both legislative bodies have included a buyout for peanut quota with future peanut production being produced like other commodities. 

(The importance of government program in individual counties is shown in tables 6,a - 6,h.)
 

TABLE 4. SELECTED FARM FINANCIAL INDICATORS FOR EACH EXTENSION REGION
STATE OF GEORGIA, 1992-1999 (Source: Bureau of Economic Analysis)
VARIABLE		E X T E N S I O N   R E G I O N
YEAR	Central	East	North	South	West	State
Crop Cash Receipts as % of
Total Cash Receipts
1992	14.18	42.39	12.14	64.80	47.11	36.81
1993	11.50	39.89	10.01	61.06	39.18	32.29
1994	13.25	44.89	11.25	65.83	44.26	36.15
1995	14.30	50.37	12.25	70.12	46.75	39.74
1996	15.41	52.14	11.77	68.28	47.27	37.18
1997	15.23	51.11	12.45	66.97	44.92	36.28
1998	15.26	47.05	12.32	64.16	42.81	32.36
1999	14.67	42.15	12.70	61.10	39.52	30.53
Government Payments as %
of Crop Cash Receipts
1992	23.82	10.32	11.07	8.23	14.74	10.22
1993	52.34	13.05	17.66	10.30	25.66	13.81
1994	42.97	7.64	18.03	4.68	12.25	7.10
1995	17.18	3.71	7.92	2.06	7.09	2.90
1996	17.71	4.99	5.55	3.86	8.62	4.98
1997	9.56	5.31	3.10	3.94	6.33	4.67
1998	12.92	9.51	5.16	8.76	11.29	8.95
1999	42.82	23.06	14.87	17.99	26.18	19.28
Operating Profit Margins (%) \1
1992	20.16	30.56	26.37	29.25	25.21	28.41
1993	18.52	21.64	24.02	23.49	18.95	23.82
1994	25.64	30.82	26.52	32.92	28.04	30.61
1995	13.71	21.74	20.69	30.79	17.53	25.34
1996	13.56	23.19	20.78	26.33	19.01	25.26
1997	14.94	20.87	21.27	24.79	16.13	24.06
1998	18.44	15.46	25.60	22.71	15.02	25.07
1999	21.88	21.44	25.70	33.29	22.70	28.32
Operating Profit Margins (%) \1
Without Government Payments
1992	18.93	27.16	25.97	25.23	19.81	25.61
1993	16.34	17.01	23.42	18.21	10.34	20.26
1994	24.04	28.33	26.09	30.80	24.49	28.79
1995	12.65	20.26	20.37	29.78	15.44	24.46
1996	12.35	21.02	20.53	24.30	16.32	23.85
1997	14.18	18.55	21.12	22.75	13.68	22.75
1998	17.57	11.09	25.40	18.04	10.35	22.83
1999	19.40	12.08	25.20	24.81	13.19	23.84
\1 These profit margins were calculated before including fixed costs, interest expense and taxes.

The prices offered (and paid) for farmland creates a problem ( and often4. an opportunity) for many farm operators. While USDA figures indicate the average value of farmland and buildings continues to escalate, data from the Georgia Department of Revenue indicates the prices actually paid for farmland in the state is greater than USDA reported data.

Date for 1999 indicates the per acre sale price of farmland in Georgia was $4,234 (see figure below). This is more than twice the average USDA reported value. 

While no information is given on the use made of this land that changed ownership, it is speculated that most of it was for non-farm use. Enterprise cost of production figures show that farming today won't pay for land with this price level. 

The price a buyer is willing to pay and the price a seller is willing to take is greater than the average reported value per acre. While date is reported for all nine statistical reporting districts in Georgia, the average value of $4234 is pulled up by sales in the northern one-third of the state, especially in the Atlanta area (table 5)

Also, sales each year may reflect some type of economic activity unique to that particular year. Prices paid within each district show variability both up-and-down over a period of time.
 

Table 5.Average Per Acre Sale Price of Farmland by Statistical Reporting District, Georgia, 1999
Statistical Reporting District	Average Value per Acre
Northwest	$4,567
North Central	9,779
North East	3,293
West Central	4,038
Central	2,545
East Central	3,215
South West	1,528
South Central	1,666
South East	2,936
State Average	$4,234

Source: Georgia Department of Revenue, Sales-Ratio Tax Base, Compiled by Dr. John Bergstrom, UGA

Commercial development of former parcels of farmland (zoning, occupant objections, etc.) can affect ongoing farm operations in addition to the pressures in a time of low profitability -- to sell a farm and either retire or pursue another occupation.

Another factor, the ratio of land rent-to-farmland values has declined in recent years. This means cash rent for farmland is going up slower than reported land values. Landowners who rent out their farmland are experiencing a lower rate of return on their land investment as this relationship takes place.

To illustrate - the state average for pasture cash rent in 2000 and 2001 as reported by USDA was $22.00 and $23.00 per acre, respectively. The reported per acre value for pasture these two years was $2,150 and $2,400, respectively. This makes the ratio of pasture cash rent-to-pasture land value be 0.0102 and 0.0090 for 2000 and 2001, respectively. These rent-to-value ratio are shown in figure 4 (next page).

...The discrepancy between record net cash farm income and the cautious mood among farmers exists for some key reasons.

About 40% of this net is from government payments. Government support for the past three years accounted for 49%, 49% and 40%, respectively, of net income. 

In 1996, the year the year the last farm bill was signed, net farm income was a record $54.8 billion. This would have been $47.5 billion without government support. In contrast, net farm income without government support for the past three years would have been $22.8, $23.5 and $29.4 billion, respectively. This 38-52% drop in the market portion of net farm income is among the most dramatic in modern history.

The 1996 experiment of shifting the agricultural sector to the free market has apparently failed. Debate over the new farm bill is testament to that fact.

While the new farm bill currently faces uncertainty, the following appears likely to be included in any new legislation:

1. Direct payments to participating program producers will be similar to flex payments of the past five years, with little change in payment distribution.

2. There will likely be new counter-cyclical program payments that automatically provides producers financial support when prices or income drop below a set level. Maybe this will make ad hoc emergency assistance from Washington unnecessary.

3. Market loans and LDP's will still exist.

4. Payment limits will be somewhat higher.

5. Conservation programs will be expanded - and funded at higher levels.

6. Trade, rural development, forestry, nutrition and other existing programs will be maintained.

7. Total authorized spending will be higher than in the past.

About two-thirds of the farmers don't get program payments and most payments go to the producers who make the most gross revenue. The top 10% of farmers get 63% of the government payments. Thus, the next farm bill will likely allow large and mid-size farm operations to remain economically viable.

Looking to the year 2002, we have record low interest rates, inflation continues to be absent, and oil prices surprised us all by plunging in a hurry - and will begin to climb only if OPEC reduces supply.

These weaker prices reflect the current U.S. economic recession. The year-ago forecast of a federal budget surplus for the next ten years has changed to the prediction of federal deficits through 2005. This means higher farm program spending won't come easy, but the importance of a reliable food supply has taken added meaning in recent months.

Some analysts are suggesting the U.S. could begin pulling out of its economic recession by next spring or summer - given no major events in the war on terrorism. But global weakness is expected to linger through much of 2002, keeping global agricultural markets soft. And, should attacks occur in the U.S., or if the U.S. loses control of events in Central Asia, then all bets are off regarding the recovery from the recession. In any event, it looks as if farm program payments will be necessary to keep farmers economically viable for the next year or two.
 

Prepared by:
Cesar Escalante, Extension Economist
William Givan, Extension Economist
 

                                           Appendix.

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