Drowning In Amber Waves Of Grain

Without price supports, farmers are looking at a nasty year

After 35 years, Elmer Boucher is quitting. The 61-year-old farmer on Mar. 31 auctioned off his machinery and finished putting his 2,000-acre farm in Rolette, N.D., into the federal government's Conservation Reserve Program, which removes environmentally sensitive cropland from production. "There's no point continuing," says Boucher. "I wouldn't have made any money this year."

Boucher is not alone. Farm sales across the Northern Plains states are on the rise. In one North Dakota district along the Red River, 15% of farms have been sold since 1996, says State Agriculture Commissioner Roger Johnson.

For the past two years, farmers have enjoyed boom times along with the rest of America, giving them some cushion against bad times. But now there's trouble down on the farm. Even as the economy is expected to rack up a robust 3% growth rate this year, the Agriculture Dept. predicts that total net farm income will drop by more than 10%, to $45.5 billion.

That's assuming commodity prices don't fall further. They've been plunging around the globe since the beginning of the Asian crisis. And with the third consecutive year of strong U.S. harvests coming, prices could be under more pressure.

At the same time, the federal price supports that buffered American farmers have disappeared. It all adds up to trouble for farmers in the U.S.--and in the communities and industries that depend on the agricultural economy.

Farmers weren't expecting such a rough transition to market-price agriculture. In April, 1996, when Senator Richard G. Lugar (R-Ind.) and Representative Patrick Roberts (R-Kan.) pushed through the Freedom to Farm Act, eliminating price supports on key crops, there wasn't a lot of protest from farmers. With commodity prices and farm incomes high, it seemed time to get the government out of farming. So the government stopped paying farmers to plant certain crops or keep fields out of production as a means of supporting prices.

Now, with the prices of corn, soybeans, and wheat, the three major U.S. crops, down 47% on average since the Farm Act was passed, freedom looks a lot less appealing. Says Bill Northey, a former president of the National Corn Growers Assn. who farms 740 acres of corn and soybeans in Spirit Lake, Iowa: "These are the tough times."

With elections looming in the fall, Democrats have seized on the farm issue. On July 14, Senate Minority Leader Thomas A. Daschle (D-S.D.) and a group of Democratic senators from upper plains states announced plans to fight for amendments to the Farm Act. They want emergency assistance for hard-hit regions. And they aim to remove the caps on government marketing loans and extend the terms on loans, which still give farmers a floor price for their crops in very weak markets.

Despite the growing plight of farmers, some experts are leery of a revived federal role. Says Terry Francl, senior economist for the American Farm Bureau Federation, a lobbying group for farmers: "To test the new farm program, we have to go through a down cycle and have farmers react to it."

If you want a test, this is a good one. Not only did the Asian crisis drag down commodity prices around the globe but it also depressed export markets. The USDA projects that lower Asian demand will push total U.S. farm exports down 7.4% this year, to $56 billion.

Meanwhile, unusually good weather across much of the country may produce bumper crops for a glutted market. The USDA expects corn and soybean harvests 3% and 2.8% larger than last year's. Brazil harvested a record crop of soybeans this winter. China, which three years ago was importing 500 million bushels of corn, now exports the stuff. "We could still see significantly lower prices," predicts Steven Bruce, a commodity broker with ED&F Mann.

Prices of wheat futures have fallen 22% this year, while prices on soybeans are off 5%. At $2.36 a bushel, the December corn contract at the Chicago Board of Trade is selling for less than half its price in 1995 and very close to a farmer's cost of production, says Northey.

The sagging prices would normally be a boon for livestock producers, who need grains and soybean meal to feed their animals. But an abundance of cheap grain is leading to an abundance of cheap livestock--and the price of live hogs on the Chicago Mercantile Exchange has dropped 32% in the last year. "This helps us stay in business maybe a day or two longer," says William B. Saunders, purchasing director for Murphy Family Farms, the largest hog producer in the country.

ARE GEAR MAKERS NEXT? It won't be long before farmers' distress shows up at the farm equipment manufacturers. Investors already expect trouble: Since mid-April, share prices of the four major equipment producers, Agco Corp., New Holland Corp., Case Corp., and Deere & Co., have dropped more sharply than commodity prices. Even Deere, which derives only half of its revenues from farm equipment, has seen its stock price slip 20% in the past three months.

Case Chief Financial Officer Theodore R. French says he isn't worried--so far. "There's a relationship between commodity prices and volume in our business, but it hasn't shown up yet," he says. Still, falling prices of grains, along with oil, forced Case to postpone some big combine sales to former Soviet republics last month, when financing fell through. And with June industry inventories of tractors and combines up 14% and 31%, respectively, over last year, according to the Equipment Manufacturers Institute, the evidence may be right around the corner.

The situation is nowhere near as dire as the mid-1980s, when high interest rates, inflation, and drought put a death-hold on farmers. But America's farmers could face profitless bounty.