Ag Outlook Underscores Importance of Capital, Strong Farm Policy

October 16, 2015

Thirty-five years ago, agriculture was on the cusp of crisis. The economy was in the tank, crop prices were low, debt was climbing, and farms were being foreclosed upon. But with some key risk management tools made available through U.S. farm policy, agriculture rose to the challenge, just as it always has.

Looking ahead over the next 35 years, farmers will again need to step up, particularly to meet the needs of a rapidly growing world population – all while using less land, less water, fewer inputs, and dealing with extreme weather and volatile prices caused by global markets distorted by high and rising foreign subsidies, tariffs, and other barriers to trade.

To succeed, Wade Easley, President and CEO of First National Bank of Hereford, with locations in Hereford and Friona, Texas, said farmers and ranchers will need a trifecta.

“New technology, strong farm policy, and access to money will all be important to help growers deal with the cyclical nature of farming in the decades to come,” he said.

But there are current economic hurdles that must be met before all eyes can turn to the future.

“Today, commodity prices are down sharply and input costs are up, especially costs associated with irrigation,” he explained. “The ag economy in Texas has been affected, and cash flow has tightened up significantly, leading several [farm] operators to bear down and borrow more short term operating loans.”

Easley said loans like these are what gets farmers through the lean years, but these loans wouldn’t be possible without strong Farm Bill and crop insurance serving as a backstop.

Unfortunately, opponents of farm policy are busy trying to cut holes in the safety net, and they often point only to the good years as their justification for harmful reductions.

When the most recent Farm Bill was debated, low borrowing costs, improved commodity prices, and rising farm income led to a strong demand for farm assets. Farming for producers of many crops in strong production areas was profitable, and as a result, farm policy became an easier target.

“We no longer have a lot of the safety net that Farm Bills have provided in the past,” Easley noted, explaining that the worst thing that could happen to agriculture now would be further cuts. “If we want agriculture to be there tomorrow, we cannot make foolish choices today. It’s important that we collectively advocate for strong ag policy.”

The Southwest Council of Agribusiness is one organization doing just that. This week, the group of 120 farm, bank, and agribusiness leaders from five states met in Lubbock, Texas, to plan for the future. And high on the list was how to deal with declining farm incomes.

Farm income is already forecasted to be cut in half compared to just two years ago, according to the U.S. Department of Agriculture.

And projected trends suggest the potential for future farm risk and generally weaker ag credit conditions. The Federal Reserve Bank of Kansas City recently noted that a prolonged downturn through 2016 could start to severely weaken farmers’ financial positions.

A 25 percent increase in the volume of operating loans in the last year indicates that the economic climate is already shifting, according to another agricultural lender.

“I would not be surprised to see another double digit increase in farm operating and long term loans over the next few years, especially when we consider the three to five-year outlook for grain prices and the recent sharp decline in cattle prices,” said Kaleb Horne, a lender at Lyons State Bank in Central Kansas.

He added: “A primary concern for our area is a producer’s ability to service term debt repayment obligations and any short term debt that will be restructured during the down turn. Unfortunately, input costs haven’t adjusted lower to a level where most producers can operate at a profit.”

In some cases, farm policy and access to additional operating capital is all that’s keeping growers going.

Horne and Easely agree that agriculture has historically shown resilience when the chips are down, but say we cannot ignore the projected trends and need to make sure farmers have the long-term tools necessary to succeed.

The next few years very well may be defining for the future outlook of agriculture. And the whole world has a lot riding on the outcome.