Like a lot of farmers these days, Rich Hillman, a rice and soybean grower in the Carlisle area, is putting off once-routine equipment purchases.
"Farmers are cutting back every way they can," Hillman said.
His implement dealer is feeling the impact of that cost-cutting. Mike Linton, general manager of Heritage Agriculture in Carlisle, is offering discounts on equipment purchases and repairs and hoping to avoid layoffs.
"We were coming off extremely good years," Linton noted, "but year to date, our business is off a minimum of 40 percent. That's tough."
Falling crop prices are the culprit. The decline started in 2014, and the U.S. Department of Agriculture announced last week that nearly half the 1.7 million farms that signed up for a new federal safety-net program will receive payments for the 2014 crop year. The program is intended to help farmers break even when prices fall, but some farmers are skeptical.
Greg Cole, president and chief executive officer of AgHeritage Farm Credit Services, said most Delta farmers lost money on an accrual basis in 2014. He said a small number might see a slight profit after the federal safety-net payments are made next month.
For 2015, Cole said, average crop prices are down 35 percent.
"If you have a 35 percent decline and your expenses don't adjust accordingly, you've got a huge profitability challenge," he said.
Another statistic paints an even starker picture of the economic downturn facing the nation's farm belt. The USDA forecasts that net farm income in the United States, adjusted for inflation, will fall 53 percent from where it was two years ago, from $123.7 billion in 2013 to $58.3 billion in 2015.
The net farm income figure includes profits from beef, poultry and pork as well as crops, but Cole said it was "the sharpest decline since the 1930s."
Industry experts don't expect a wave of farm bankruptcies this year or next, mainly because most farmers are carrying less debt and interest rates are at historic lows.
However, they agree that vulnerable farmers could struggle to survive, especially if the downturn in crop prices persists for three to five years. Farmers who do have high levels of debt could have trouble paying off their 2015 production loans, Cole said, especially if they also have high production costs, rent most of their land and lack adequate cash reserves.
Ted Glaub, owner of Glaub Farm Management in Jonesboro, said young farmers would be exposed to the greatest risk because they have less equity than more established growers.
"The coffee house rumor we're hearing is that 25 to 30 percent of farmers won't pay out on their production loans," Glaub said. "I'm speculating that 10 to 15 percent will be forced out of business."
Freddie Black, Arkansas regional chairman for Simmons First National Bank, is somewhat more optimistic. He said his loan officers are meeting now with farmers to determine how they fared in 2015.
"What we're seeing so far is a high percentage of customers with carryover debt," Black said. "If that continues, we might see the bottom 5 percent fall out."
He said Simmons has $150-170 million in outstanding farm production loans this year. He said the bank would work with farmers who have equity to restructure their 2015 loans and get them ready for 2016.
Commodities have always been subject to booms and busts, but farmers are coming off a period of especially strong prices. Largely spared the effects of the recession, farmers, like other commodity producers, benefited from the extraordinary growth in China. As incomes grew, consumers there began eating more meat, which drove up corn and soybean prices, said Archie Flanders, an economist with the University of Arkansas System Division of Agriculture's Northeast Research and Extension Center.
Higher prices stimulated production around the world, Flanders said, creating an oversupply of those crops.
Rice, meanwhile, is something of a special case. Because it is a staple in many parts of the world, its price is heavily influenced by government policies, experts say. Subsidized production in some countries created large stockpiles, they say, which depressed prices earlier this year.
Now, there are indications the world supply is falling, Flanders said, a trend that could be reinforced if the El Nino weather pattern disrupts rice production in Southeast Asia.
"Bad weather can change things quickly," Flanders said.
Still, the strong dollar puts American producers at a disadvantage.
The U.S. is currently the fifth-largest rice exporting country and supplies about 8 percent of global shipments, according to the USDA. But Nathan Childs, a senior economist with USDA's Economic Research Service, said this week that the U.S. share of global rice sales is declining even though global trade is increasing.
U.S rice prices are $200 higher per ton than Vietnam's, Childs said, and also exceed Brazil's price. Because of its higher relative price, the U.S. is not competitive in Southeast Asia, sells little to South Asia and has lost market share in sub-Saharan Africa, Childs said.
Back in Arkansas, growers are making a number of adjustments in response to the general downturn in prices in addition to cutting their costs.
Flanders predicted that beef and pork production would increase because feed is relatively cheap. That could mean more cattle in particular on the market in 2017, Flanders said.
Ron Rainey, an economist with the UA Division of Agriculture's Extension Service, said he has seen "unprecedented interest" this year from row crop farmers in adding fruits and vegetables to their operations. Fruits and vegetables typically have a higher margin than row crops but come with their own set of challenges, Rainey said.
"The big issues are growers understanding the marketing systems, the labor needs and the handling of perishable crops," Rainey said.
Unlike row crops, specialty crops are typically picked by hand, Rainey said, which could increase the state's reliance on migrant labor. In addition, he said specialty crops must be graded, washed, packed and cooled on the farm, adding to farmers' costs.
Despite those complexities, Rainey said he's seeing interest in fruit and vegetable farming from growers "all up and down the Delta."
Whether or not that interest results in substantial changes to the state's agricultural mix may depend on the length of the commodity downturn.
Black, who is a partner in a farming operation in addition to being a banker, noted that many row-crop farmers rent from institutional or foreign landowners who charge $150 to $250 an acre. "At these commodity prices, you just can't pay those rents," he said. "If we have another year of low prices and not such a good crop, it will really get worse."
Cole, who said AgHeritage has about $1 billion in outstanding farm loans, agreed. "We could lose the bottom 25 percent of producers over the next three to five years if the down-cycle persists," he said.
SundayMonday Business on 11/01/2015
Print Headline: Falling crop prices hurt farmers' bottom line