More farming shakeouts expected The coming year should provide another round of "shakeouts" for Southern farmers and ag lenders. But agriculture will remain viable and profitable for the "low-cost" producer.
That's one ag lender's viewpoint, presented recently at the Southern Region Agricultural Outlook Conference in Atlanta.
"Low-cost producers, and those who are able to integrate and provide value-added products, will prevail," said Bill Melton, vice president of AgFirst Farm Credit Bank. Ag First consists of 27 district associations providing credit and related services to borrowers in 15 states and Puerto Rico.
And, while there's sure to be another round of shakeouts in agriculture, advances in biotechnology will insure that the food supply is not diminished by producers who leave farming, he says.
Any "outlook" for Southern agriculture must be made against the backdrop of several currently occurring factors, says Melton. "One of these factors is rising interest rates. We've seen an increase of 175 basis points since June of 1999. We've also seen extreme weather patterns, especially in the lower Southeast where drought was a problem this year.
"Other factors include uncertain farm policy for the long-term, a weakening loan demand in some areas, soaring energy costs and a massive transfer of wealth between generations. We can look at all of these factors and conclude that it's an ideal time for making poor decisions," he says.
Looking at the agricultural market by commodity type, Melton says the current trend in the meat complex, including pork and broilers, is towards significant company consolidations, vertical integration and a drive to compete on a worldwide basis.
"The near-term outlook for the meat complex is for very large production in the United States and expansion based on cheap grain prices. In the long-term, a growth in exports will be the key to growth in the industry," he says.
Regulations relating to food safety and the environment are becoming more stringent in the meat complex, adds Melton.
The near-term outlook for small grains includes over-production and continued price pressure, he continues. Over the long-term, U.S. competitiveness should win out, he says.
"The general trend in the grain complex includes the consolidation of production units and a boost in yields from biotech. In addition, genetic modification will regain momentum."
U.S. economic growth will slow sooner rather than later, says Melton, thereby affecting the green complex, including nurseries, greenhouses, sod production and timber.
"Growth in this sector is geographically driven on the East Coast and will outperform the economy. Economic growth up to now has stimulated demand at the double-digit rate."
Growers should continue to see a consolidation of units in the fruits and vegetables industry, says Melton. Current trends include the continued globalization of production and distribution, he says. In addition, the NAFTA trade agreement is shifting some production.
Looking at the entire agricultural economy, Melton says the impact of stress in the economy will not be borne equally.
"Regionally, the Eastern United States is more diverse in its production agriculture and less dependent on government support. Generally speaking, some commodities always will be in a down cycle. This year, it's broilers, eggs and dairy."
Free trade, says the lender, is critical to a healthy agricultural economy. "NAFTA is starting to take hold with Canada and Mexico - our best trading partners. And a very positive sign for agriculture is the permanent `Most Favored Nation' status granted recently to China by the United States."
The brightest spots in 2000 include a robust general economy that produces a government surplus, and the $24.3 billion in government assistance already approved for agriculture, says Melton. Assistance also looks like a certainty for next year, he adds.
In the future, growers will continue to see consolidations within the production and processing sectors and also in the marketing sectors, he says. This will be especially true in the poultry and livestock industries.
"We'll also see a continuation of strategic alliances and long-term contracts between producers and food companies. Tobacco growers look as though they finally are going to go directly to the factories with their product. And the nursery/greenhouse industry is beginning to behave more like a fully integrated industry."
Melton also expects continued consolidation in banking, including the Farm Credit system. AgFirst, he says, will be down to 23 associations by the end of the year compared to 40 associations two years ago.
Producers will find it increasingly difficult to get large confined livestock and poultry facilities permitted as environmental, land use and safety regulations are strictly enforced, he predicts.
"Interest rates have risen sharply since June of 1999, and energy prices will be a large factor in subsequent adjustments. As far as the general economy is concerned, the Fed appears to have achieved a `soft landing.'"
Melton hasn't seen any of the "early warning signs" that typically signal problems for the ag lending industry. "We don't know if the statistics are lying or just lagging. Our delinquencies continue to be below one percent, we have normal charge-offs, very few foreclosures and stable asset quality."
Factors are occurring, however, that could be translated as early warning signals, he adds. "Net farm income is buoyed by government payments, creating a false economy. This concerns us. If the government payments are taken away, it'll be very difficult. Also, ag real estate has held its value or risen in value. The dilemma here is that higher land values make the price of a product non-competitive.
"And, while the level of debt held by farmers is not substantially higher, we're becoming increasingly dependent on government assistance for repayment capacity."
Farmers now have a new crop, he says, and it's called "mailbox farming." For 2000, it's estimated that government payments will contribute about $27 million to a total net cash income for farmers of about $59 million. Up to 58 percent of the payments are being made to family farms, he says.
Other troubling signs for lenders includes a pattern of "flipping land" by speculators, says Melton. "There's a lot of this going on, especially in the timber business. People buy land and then sell it, with everyone taking their cut.
"The amount of 100 percent financing also is troubling, as is the trend of expanding an enterprise without regard for the business cycle."
Melton predicts that East Coast agriculture will fare better than the Midwest in the near future. Also, prices for broilers, eggs, dairy and timber will continue to be impacted negatively by supply.
"Over-production will again hurt hog prices and keep dairy profitability at a very low level. Over-production will continue to be a problem for all of U.S. agriculture."