Not Quite A Cash Crop

Never an optimistic lot, America's farmers this year may have more to beef about than usual.

True, the Agriculture Dept. on Aug. 12 said it expects bin-busting corn and soybean crops--despite problems with cold and rainy weather. But the huge harvests may not mean much to the growers. That's because rising costs, a decrease in government subsidies, a continuing downturn in livestock prices, and a drop in wheat, corn, and soybean exports will all combine to squeeze farm income. On top of that, the bumper crops are driving crop prices way down. Corn prices, for example, are expected to sink from their current levels of $2.23 a bushel, which is already far below last year's $2.51 (chart).

EARLY FROST? Add it all up, and the picture isn't pretty. Indeed, the Agriculture Dept. projects that farmers' cash income this year will drop to as low as $51 billion, 18% below the record $62 billion set in 1990. And that's the optimistic scenario: If an early frost hits and puts a dent in the government's huge crop forecasts, the income figures could be even worse--down by as much as $2 billion from the official forecast, say some economists.

A drop in farm income would spell big trouble for agricultural-equipment makers, who already are suffering from a steep sales slide brought on by tightfisted farmers and an unsuccessful effort to raise prices by as much as 10% earlier this year. From April through June, a key selling season, domestic sales of large tractors dropped 50% from the year-ago period, while combine sales skidded 67%. The impact on Deere & Co., for one, has been dramatic. Alexander M. Blanton, an analyst with Ingalls & Snyder in New York, projects a 10 loss per share for the company this year, a sharp drop from the $1 a share profit he foresaw at the start of 1992.

Meanwhile, the big harvests won't even provide comfort in the form of lower food prices for consumers. Farm costs make up only a thin slice of the price tags on grocery store items. If there is a silver lining to all these problems, it is that low prices promise big gains for such grain processors as Archer Daniels Midland Co. and privately held rivals Cargill Inc. and Continental Grain Co. Indeed, those companies are snapping up their raw material, such as corn and soybeans, at their lowest prices in four years.

LESS DEBT. Still, the drop in farm income isn't likely to set off a wave of foreclosures and bankruptcies similar to those that took place during the mid-1980s. Learning from that sorry experience, farmers have trimmed their debt from the 1984 high of $193.8 billion to just $138.4 billion last year, a 29% drop. That means, even with incomes falling, farmers are looking at their strongest balance sheets in years. "The farmer may be in desperate shape. But the difference is that he has paid off his debts and doesn't have them hanging around his neck any more," says Daniel Basse, director of market research for Ag Resource Co. in Chicago.

Those balance sheets are so healthy that lenders are rushing back into the farm belt. In 1991, the portfolio of farm loans held by private banks jumped 6%, to a new high of $53 billion, with most of the increase attributable to real estate loans. And the government-backed Farm Credit System last year saw its first year-over-year gain in farm lending in nearly a decade. The upshot: Farmland values rose by nearly 2% in many parts of the Midwest early this year, reversing declines in the prior year. Indiana, Michigan, Illinois, and Iowa have shown particular strength, according to a recent study by the Federal Reserve Bank of Chicago.

That doesn't mean farmers are rushing to take on unnecessary debt. They're too busy worrying. Just ask Leland Behnken, who says his 2,600-acre corn and soybean farm in west-central Illinois is surrounded by trouble. To the south and east, heavy July rains drowned some fields of corn in as much as 12 inches of water. To the northwest, late plantings have delayed the crop, Behnken says, putting farmers at risk for an early frost. Meanwhile, way out in California, six years of drought have badly cut into farmers' yields. "There's a good crop out there somewhere," the 66-year-old Behnken says. "But it's been a frustrating year for a lot of farmers."

FEDERAL FUNDS. If a bumper crop does come in this year, it could be George Bush who ends up getting stuck with the excess. Bush will have to dip deeply into Uncle Sam's till if he wants to keep the farm vote happy by creating a market for the expected oversupply. His two alternatives--boosting exports with trade credits and paying out price supports--both come directly out of the U.S. Treasury.

"It's going to be interesting to see how the government responds to some potentially extremely low prices during an election year with the President trailing in the polls," observes William Bailey, director of research for agricultural consultant World Perspectives. But, already worried about an early frost and their disappearing hopes for higher income, farmers wince at the thought of another "interesting" year.

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