While some farms are still facing cash flow deficits and a real net worth decline, the majority of those included in a recent study by Texas A&M University appear to do better under the new farm bill.
“Frankly, the new farm bill as we know it is projected to put most producers in a lot better shape than they would have been under the previous farm bill. Are there problems still? Yes, but things are significantly better, says Joe Outlaw, an economist with the Agricultural and Food Policy Center at Texas A&M University.
The study, which utilized representative farms across the South to analyze the farm level impacts of the 2002 farm bill, based its findings on expected cash flow and real net worth under both the previous farm bill and the 2002 legislation. Specifically, Outlaw projected the probability of cash flow deficit and the probability of losing real net worth under both farm bills.
The probability of cash flow deficit was based on the chance that net cash farm income is less than family living, taxes, principal payments, and machinery replacement costs. The probability of losing real net worth is based on the chance that a producer's net worth, when adjusted for inflation, is less than his net worth at the end of 2001.
In simple terms, how many times out of 100 did a producer have to go back to the banker during the crop season? How many times out of 100 was the producer's ending net worth at the end of the projection period below what it was at the beginning of that crop year?
After determining a farm's overall financial position, Outlaw rated each farm using a stoplight analogy for both cash flow and net worth. In a nutshell, green is good, yellow is not so good, not so bad, and red is poor.
More specifically, a green “good” rating means a farm has less than a 25 percent chance of suffering a cash flow deficit and losing real net worth. A yellow “marginal” rating gives a farm a 25 to 50 percent chance of cash flow deficits and loss of real net worth, and a red “poor” rating predicts a greater than 50 percent chance of cash flow deficits and loss of real net worth.
Assuming no market loss assistance in 2002, every representative feed grain farm in the study would have experienced financial distress under the 1996 farm bill, according to Outlaw.
“From year to year, some farms may still have cash flow problems, most will be in better financial condition under the new farm bill. It's a situation where, relative to not having that market loss assistance payment, we should see significant improvement in economic viability across all farms,” he says.
According to the economic analysis by the Agricultural and Food Policy Center, six of the eight representative feed grain farms in Tennessee, South Carolina and Texas would be in the “red” category for cash flow deficit in 2002 under the 1996 farm bill. One of the remaining two farms would be labeled “marginal,” and one would be labeled “good.”
Anticipated declines in real net worth put three of the farms in the “red” category, three in the “yellow” category, and two in the “green” category.
Under the 2002 farm bill the economic outlook for these eight feed grain farms improve slightly with three in the “green,” three in the “yellow,” and two in the “red,” for cash flow deficit probability. Things look even brighter when it comes to a decline in real net worth, with six of the farms moving to “green,” one to “yellow,” and one to “red.”
The outlook for cotton farms is “considerably better,” Outlaw says. “Our estimates are that cotton will get a full counter-cyclical payment this year.”
“Under the 1996 farm bill, not much out there was good, with four of our representative farms in moderate shape and seven in poor shape,” he says.
Jumping to the 2002 farm bill, all of the eleven representative cotton farms in Texas, Arkansas, Louisiana, Tennessee, Alabama, Georgia, and North Carolina, face a less than 25 percent chance of losing real net worth this year. The probability of suffering a cash flow deficit is also low for six of the eleven farms, with three farms ranked as “marginal,” and two as “poor.”
The study's representative rice farms in Texas, Louisiana, Arkansas, and Mississippi, also appear to be better off for the most part.
Outlaw says, “There are some cash flow problems still out there, but there seem to be less under the new farm bill.”
A continuation of the 1996 farm bill would have put five of the study's farms in the “red,” and one in the “yellow,” when it comes to cash flow deficit probability. The probability of losing real net worth in this scenario was greater than 50 percent for four of the farms, a less than 25 percent for the remaining two farms in the study.
2Outlaw says that under the 2002 farm bill, the probability of losing real net worth is less than 25 percent for each of the representative farms. Cash flow, however, continues to be a problem for three of the six farms.
“Across the board, we expect to see some general, significant improvement in the economic viability of Southern row crop farms. There may still be considerable cash flow pressure for some operations, but pressure on equity should decrease as land values are expected to step from recent slides,” Outlaw says.
The Texas A&M study assumed that the 2002 farm bill continued through 2007 with no market loss assistance payments after 2001, that farmers are able to update base and yields to maximize government payments, and that farms are structured so payment limits are not binding.
In addition, the study's representative farms borrow all of their capital, and real estate debt assumed to be 20 percent for grain, cotton and rice farms.