Monday, August 31, 2009

Recession Finally Hits Down on the Farm

AUGUST 28, 2009

By SCOTT KILMAN and LAUREN ETTER, Wall Street Journal

The American farm, which has weathered the global recession better than most U.S. industries, is starting to succumb to the downturn.

The Agriculture Department forecast Thursday that U.S. farm profits will fall 38% this year, indicating that the slump is taking hold in rural America. Much of the sector had escaped the harsher aspects of the crisis, such as the big drop in property values plaguing city dwellers and suburbanites.

"It is safe to say that the global recession has finally shown up on the doorstep of the agriculture economy," said Michael Swanson, an agricultural economist at banking giant Wells Fargo & Co.

Oakley, Ill., farmer Mat Muirheid works in his corn field in May.The Agriculture Department said it expects net farm income -- a widely followed measure of profitability -- to drop to $54 billion in 2009, down $33.2 billion from last year's estimated net farm income of $87.2 billion, which was nearly a record high. The drop in farm prices is likely to lead to a slower increase in food costs for American consumers, economists say.

The slump isn't affecting all farmers equally: Many are still reaping big profits while others are having a hard year. Farmers are accustomed to seeing their incomes swing widely, due to the vagaries of such things as Mother Nature and the oil market's impact on the price of corn-derived ethanol fuel.

For instance, sugar farmers are seeing the highest global prices in 28 years, in part because of harvest problems in India. But many dairy and hog farmers are barely holding on because of low prices and shrinking foreign demand.

The sector's expected profit decline is unusually steep, coming after two boom years. According to USDA calculations, its 2009 forecast is $9 billion below the 10-year average for farm profits.

Jay Roebuck, a 52-year-old dairy farmer in Turner, Maine, said he is falling behind on bill payments even though he has laid off two workers and reduced the rations of his cows. "This is by far the worst it's ever been," said Mr. Roebuck, who estimates he is losing $9,000 monthly.

For most Americans, the chill in the farm belt is related to one of the few positives they see in this economy: slowing inflation. Prices farmers are receiving for corn, wheat and hogs are down sharply from last year. Partly as a result, economists expect the Consumer Price Index for food to rise 3% this year, compared with 5.5% in 2008, which was the fastest annual rise in 18 years.

Less than 1% of Americans are engaged directly in agriculture. Yet farmers have a big impact on the economy. They are big spenders, produce commodities that are ubiquitous in the economy, and use about half of the nation's land. According to past calculations by the USDA, agriculture and food account for about 13% of U.S. gross domestic product.

The profit drop signals that the decades-long contraction in the number of farmers who produce commodities such as hogs and milk is likely to accelerate this year.

Growers will probably cut back even more on their spending plans, making it harder for companies that sell such things as tractors, seeds and fertilizer to raise prices to farmers.

"There is likely to be more pressure on pricing," said Ann Duignan, an analyst at J.P. Morgan who follows farm-implement makers. She said Thursday that manufacturers will probably have the hardest time passing along higher costs to livestock operators, who are having the most financial difficulty.

The profit drop is a wrenching change for farmers, many of whom enjoyed the most profitable years of their careers in 2007 and 2008, when crop prices hit stratospheric levels. Fueled by rising federal mandates, the ethanol industry's appetite for corn exploded. At the same time, the growing middle class in emerging nations such as China was increasing its spending on U.S. farm goods like soybeans and pork.

Many farmers were able to reduce debts and increase savings, helping to insulate them from the recession in 2008.

Part of what had held the recession at bay in farm country earlier this year was that the prices of corn and soybeans, while down from last year's levels, were still roughly twice as high as what had been normal early this decade and in the 1990s. But prices of these commodities have steadily retreated in recent weeks amid forecasts for bumper harvests this fall.

U.S. corn farmers are projected to harvest about 12.8 billion bushels this fall, which would be the second-highest crop ever. Soybean farmers are expected to harvest a record 3.2 billion bushes. The price of corn and wheat is 41% lower than last year, while prices of hogs and nonfat dry milk are down one-third from 12 months ago.

Gene Gourley, who raises 60,000 hogs every year on his farm in Webster City, Iowa, is losing as much as $30 on each hog he sells. He said Thursday that he is rethinking plans to buy a trailer for hauling feed to his livestock. "With hogs losing so much money, you're basically burning up anything you could have saved," said Mr. Gourley. "You just don't have the equity to go buy new upgrades."

Before the recession, hog farmers enjoyed several years of good business in part because exports were booming to countries such as China.

When the recession took hold, restaurants cut orders for pork and foreign demand cooled. Pork exports in June were 36% lower than June 2008, according to USDA figures.

The decline in commodity prices also has begun to depress the value of U.S. farmland for the first time in two decades.

The Federal Reserve Bank of Chicago said in a report it issued Thursday that the price of good quality farmland in Iowa and Michigan was 5% lower on July 1 than it was on the same 2008 date.

Falling land prices are making it harder for farmers to borrow because land is their biggest source of collateral. "No question that specific industries are burning through working capital very quickly," said Bill York, chief executive of AgriBank FCB, St. Paul, Minn. "Pork and dairy are of particular concern."

Farmers, many of whom already receive federal subsidies, are seeking more help. Last month, the Obama administration said it will put an additional $243 million into the pockets of dairy farmers by temporarily raising the price the government pays for products such as cheese under its long-running dairy-price support program. Midwest governors are asking Washington to buy more pork for government nutrition programs in hopes that would raise hog prices.

The requests are likely to agitate critics of agricultural aid, who argue, among other things, that the average farmer is much wealthier than the typical U.S. household, and that U.S. subsidies put farmers in poor nations at a competitive disadvantage.

Write to Scott Kilman at scott.kilman@wsj.com and Lauren Etter at lauren.etter@wsj.com

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