Strong national farm balance sheet expected

Against a gloomy economic backdrop, the country's farm sector still managed to fare well in 2008 with an annual net farm income of $90.7 billion, representing a 3.8 percent improvement over the 2007 level and 33 percent above the average income over the last 10 years.

“The industry benefited from favorable commodity price trends that surged and remained relatively high in early 2008,” says Cesar L. Escalante, University of Georgia economist. Escalante presented his financial outlook for Georgia farms in the 2009 Georgia Ag Forecast.

Price gains, however, were tempered by rising costs of production, which were estimated to have reached $292.5 billion in 2008, representing a 15-percent increase over the previous year's level, he says.

“The economic strain from producer cost inflation has been compounded in Georgia and the rest of the Southeast region by persistent drought conditions,” says Escalante. “Despite such a hurdle, productivity estimates indicate that Georgia crop farms have still managed to turn in favorable yields in 2008, although the levels are not nearly approaching record-setting levels registered several years ago. Impending drought conditions, however, translated to a higher use of farm irrigation systems, thereby causing further squeezes in farm profit margins.”

A reconstruction of Georgia's farm profit and loss conditions yielded a net farm income estimate of $2.19 billion in 2008, which is about the state's 10-year median net farm income despite a 16.43 percent drop from the 2007 level, .“At this juncture, USDA economists predict a pessimistic outlook for farm income prospects in 2009,” he says. “A weakening economy could push commodity prices downwards. Farm incomes may well depend on how input prices respond to volatilities in the energy and fuel markets, among others.”

The current global economic slowdown, which is projected to be more severe and longer than expected, could cause further reductions of global energy demand and additional declines in crude oil and other energy, says the economist. Energy price trends could translate into significant downward adjustments in production costs, says Escalante.

“In order to maximize returns, farmers should devise more innovative marketing strategies to offset the effects of low commodity prices and realize decent farm returns for 2009,” he says.

Average farmland prices as of January 2008 were estimated at $2,970 and $1,230 per acre for croplands and pastures, representing increases of 10 percent and 6 percent respectively, over 2007 prices.

“Notably, these growth rates are lower than the 2007 rates of 13 percent and 16 percent, respectively. As in the past, favorable farm business returns and farm programs, among other factors, were the main drivers of the appreciation of farmland values. The USDA estimates for Georgia croplands and pastures at the beginning of 2008 were $4,770 and $7,800 per acre, representing a growth rate of 7.4 percent for croplands and a decline of 4.3 percent for pastures over 2007 levels,” says Escalante.

Along with Florida, Georgia recorded an unusual decline in pastureland that deviated from the national trend, he notes. “The two states' pastureland markets are said to be contracting, which beef industry experts attribute to a ‘land-buying frenzy in which speculators fueled a 22-percent annual average price growth in Georgia and 25 percent in Florida between 2000 and 2007.’”

Even under the current recessionary conditions, says Escalante, the national farm balance sheet is expected to sustain such a strong financial position in 2009.

“Such financial strength can be attributed to the sector's profitability, asset appreciation, and prudent use of its leveraging capabilities. The national farm sector's leverage or debt-to-asset ratios over many years look very attractive by practically any lender's standards. In 2008, 12 percent of Georgia farm assets were financed by debts. The highest proportion of debt financing since 1990 was recorded at about 18 percent, which still rates very well in lenders' credit risk assessment models.”

The crises in the financial industry have pressured lenders to implement tougher lending standards in order to upgrade the quality of their loan portfolios and provide an adequate cushion against operating losses, especially as a result of loan payment delinquencies, says Escalante.

“These changes in lending practices include, among others, more conservative, higher standards for down payment rates, minimal credit scores and collateral requirements. The lenders' re-evaluation and modifications of their credit risk models could result in the emphases of more stringent financial performance criteria to weed out potential delinquent borrowers. Guaranteed lending arrangements will most likely be more prevalently used in packaging loan accommodations.”

TAGS: Management
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