Number of farmers under financial stress expected to rise
But report not all 'gloom and doom,' economist says
Eighty-four percent of U.S. agricultural professionals surveyed say the probability that many producers will experience financial stress in the next three years is "high or very high."
This from a recently completed survey of 2,300 professionals--agricultural producers, agricultural economists, consultants, educators and lenders--in all 50 states.
The survey was completed in January by four the Regional Risk Management Education Centers and the Center for Farm Financial Management at the University of Minnesota.
In Texas, 89 percent of agricultural professionals expect a sizable number of farmers to experience financial stress in the next three years, according to Dr. Jason L. Johnson, Texas AgriLife Extension Service economist and associate director of the Southern Region Risk Management Education Center at Stephenville.
The respondents were also asked how many agricultural producers whom they work with are currently experiencing financial stress. On a national level, 62 percent of the respondents said 10 percent of the producers they work with are currently experiencing stress. Thirty-eight percent said less than 5 percent were currently financially stressed.
However, "both the U.S. and Texas perspective depict an expected trend moving toward a sizable increase in the percentage of producers experiencing financial stress," Johnson wrote in his report, "The Financial Condition and Sources of Financial Risk for Agriculture in 2009."
Respondents were also asked to identify the major factors contributing to farm financial stress. The top three were price/input cost margins, price volatility, and negative cash flows.
Price volatility shouldn't need much clarification for the lay person, Johnson said. Prices for feed grains and cattle have gone from average or low to historically high, then back to low in the past year. Input price swings have been even more volatile.
Price/input margins refers to the challenging balancing act that agriculture producers must complete successfully in order to survive, Johnson said.
Input and the commodities produced with them do not always move up and down in lock step, he said. A producer may lock in what he or she thinks to be a good selling price, only to find that increasing input costs have completely undermined expected profits. "Producers are learning that managing for profit means managing both input costs as well as the selling price for their commodities," Johnson said. "What happens is that when margins shrink, we have increased risk but reduced potential rewards at the same time. The margin for error shrinks and the consequences of mistakes are magnified. That's not a good recipe for prosperity." Johnson said.
And shrinking margins often mean negative cash flow--more money going out to inputs than are coming in from sales.
What all this highlights, Johnson said, is that we are in a global economy.
"We're competing on a global level--with China, for instance--for those inputs," he said. "At the same time, we're experiencing a global financial recession. When people have less money to spend, the demand for what we produce and the price they will pay, both here and abroad, goes down."
Inadequate business planning was identified as the fourth contributor to financial stress. Tightening credit availability was the fifth. Declining land value was a minor contributor, the last of 13 assessment factors identified.
"According to the respondents, only 7 percent of producers are currently 'well-equipped' in terms of financial management skills to manage their business through a period of financial stress," Johnson wrote.
But on a more positive note, the respondents thought the majority of producers were "moderately equipped" to manage financial stress, Johnson said. This means that with some assistance and maybe increased knowledge, producers have the capacity to adapt to the new market environment.
Among these skills is the ability to produce the documentation needed to secure loans, Johnson said.
"It's pretty gloomy (report), but it's better to acknowledge these risks now than it is to wonder three years later what happened to your operation," Johnson said.
The full report can be found online at http://overton.tamu.edu/farmrisk2009.pdf.