>> BOBBY COATS: It is a pleasure for us to be with you.
I'm Bobby Coats, a professor in the Department of Agricultural Economics and Agribusiness
in the University of Arkansas System's Division of Agriculture.
Now Professor James Richardson joins me from his Agricultural and Food Policy Center at
Texas A&M University.
To discuss Farm Policy and their "Baseline Outlook" for the cash-flow and equity position
for their 90 U.S. representative farms.
Dr. Richardson has few equals in his area of expertise.
James is Co-Director of the Agricultural and Food Policy Center.
He is Texas A&M AgriLife Senior Faculty Fellow, and Regents Professor in the Department of
Agricultural Economics at Texas A&M University.
Dr. Richardson is best known for his farm level policy analysis research that is used
by Congress to compare the impacts of alternative farm program options and for his work in simulation
modeling.
Anyone interested in the current Farm Bill discussion and understanding the economic
viability of not only rice farms, but crop, dairy and beef cattle farms and ranches will
find this presentation highly informative.
Now Professor James Richardson on their December 2017 Baseline Projects of Economic Viability
for Crop, Dairy, and Beef Cattle for the Next Five Years.
James, we look forward to your presentation.
>> JAMES RICHARDSON: As Bobby said, we prepare a baseline every year and take to Washington
and present it to Congress.
We have preliminary baseline in December and final baseline comes out in March.
We're in partnership with FAPRI on these baseline projections.
They provide projections of national prices and we take the information and run them through
our models using our representative farms.
We have 63 representative crop forms around the country right now and roughly 35 dairy
and beef cattle operations.
So I'll be talking about the FAPRI December 2017 baseline.
We presented this in Washington in December and we're getting ready to go back with another
baseline review presentation in March.
We built a whole farm simulation model here in AFPC about 40 years ago, and we've been
using it to advise farm policy for the House and Senate Ag committee staffers since 1985.
So the purpose of this outlook is to give us a projection of what farmers might look
like over the next five years, 2016-2022 is our actual study period in this analysis.
We define everything in really simple terms.
We put it down as good, marginal and poor.
And we classify these in green, yellow and red.
So it's easily understood graphically.
We consider a farm good financial position if it has less than 25% chance of a negative
ending cash balance.
And less than a 25% of chance of losing real net worth.
So net worth adjusted for inflation.
A marginal farm is one that has a 25-50% chance of a cash flow deficit and losing real net
worth, and a farm that is in poor financial condition is one that has more than a 50%
chance of losing real net worth and having negative ending cash.
So let's start here with our feedgrain farms.
We have reference to feedgrain farms around the country as you can see here, and what
we mean by representative farm -- I'm always asked about that, Bobby -- it's a panel of
real producers who are the most typical farm size in accounting.
We've got this Iowa farm, just pick on it for a minute.
It's Webster County, Iowa, northwest Iowa.
We asked the county agent to pull together five or six producers who were of the typical
size, full-time farmers, not taking a large income off the farm with some kind of off-farm
employment.
We wanted corn/soybean farmers in the area, so they pulled together producers.
The first time we met with the panel was 1987.
We updated that farm every two years to three years since then.
All of our farms were updated in 2016 and 2017 in preparation for the 2018 Farm Bill.
So this is the outlook that FAPRI gives us for market prices, and you can see the market
price for corn, the black line here, is slightly below to just slightly above the reference
price, all the way out to 2022.
So the next question is, what does this mean to us?
Well, when we compare our baseline projections, we talk about what percent of the farms in
green versus in red.
Let's look back here in January of '14.
Things looked pretty rosy back then.
We had 50% of our farms, 55% of our farms in the green category.
By 2016, prices had fallen, PLC payments weren't large enough to make up the full difference,
and we saw an increase in red category to almost 50% of the farms.
In January of 2017 we were forecasting 50% of our feedgrain farms as being in the red.
This baseline December '17 is a little bit better.
We have a little bit more -- more of our farms in the green, less in the red, a few more
in red.
Now let's turn specifically to the regions.
And if we look at these, let me interpret these results here a little bit.
Let's look at this Iowa farm.
This is a 1350-acre Iowa grain farm.
That's what the IA is.
These are north Nebraska, North Dakota, Indiana, Missouri, Louisiana, Tennessee...
Tennessee again...
North Carolina, South Carolina...
South Carolina and Texas.
Different Texas farms.
Just interpret this red here.
This number 96 is a probability that our model says that this farm would have a cash flow
deficit in 2017.
And by 2022 it would have a 98% chance of a cash flow deficit.
The real tough part is, if you have that many cash flow deficits, it starts drawing down
your real net worth.
And so we're saying here, the model says that in 2017, we would have a 78% chance of losing
real net worth that year and a 93% chance of losing real net worth by the time we get
to 2022.
So these guys have farmed for six years and they have less net worth than they started
with.
That's what that red really says here.
If we look down through here, we have nine of our farms -- let me back up -- we have
nine of our farms that are in the green category, when we're looking at this overall ranking
in 2022.
We have five of them that are in the marginal category, and we have nine of them in the
poor category.
So it doesn't look real well for cash flow situation for these farmers over the next
six years.
And this is assuming a continuation of the Farm Bill and assuming that in 2018 that these
-- the farms that were in ARC are able to switch over to PLC.
So let me say that again.
We assumed like the Congressional Budget Office that even if the Farm Bill is continued, just
the way it is, that in 2018 farmers will have a reelection option given to them to switch
from ART to PLC because it looks like PLC would be paying more over that future time
period.
Now, if we look at wheat farms, we've got wheat farms, and I know you grow wheat in
Arkansas, Bobby, but what we have here for our wheat farms is a farm that has more than
50% of its receipts coming from wheat.
So we've got South Central Kansas, Northwest Kansas, Colorado.
This is out there in the dryland area.
Montana, Washington, Oregon.
And their wheat prices projected from FAPRI, the reference price all the way out, which
would mean that quite a few of these farms would actually prefer to move to PLC after
2018 than to stay in ART.
Again, we made that option in there.
So here is what it looks like for our baselines.
Back in January '14, things looked really good for wheat farmers.
And even January '15.
Only 20% of them in the red.
We had almost 50% of them in the green.
2016 came, low wheat prices.
We now had 55% of our wheat farms that we were following in the red category.
And we thought that was bad.
And then January 2017 came along and we're up to 70 -- almost 75% of our wheat farms
in the red.
Now, things have improved.
The outlook from FAPRI right now is a little more positive.
And we're running about 35% of our farms in red, and we picked up a couple more farms
in our green category.
So turning specifically to those wheat farms, we've got this Washington wheat farm here,
2,000-acre, typical family farm in the southeastern Washington, around the Paulouse area, cash
flow deficit, definitely in the green category at the outset, 1% in the end.
The larger farm here has a higher probability of cash flow deficits.
And I want to speak to that for a moment.
This farm is four times larger, and what they're doing is they're spending more money on equipment
and -- on equipment and labor.
And this is what is really pulling their cash flow down.
Every once in a while you have to replace that equipment.
It does wear out.
Now, one of the monitors I watch is this 3,000-acre wheat farm in eastern Colorado.
Now, this farm has a 98% chance of a cash flow deficit.
And what really troubles me about this farm, these farms have generally had the lowest
cost of production of any of our wheat farms in the country.
They have a philosophy that -- and this comes strictly from the panel farmers there that
we meet with.
They have a philosophy that it's a three-in-one management.
They have one crop in the ground, one in the bin, and one saved up in the bank.
And that's the only way these guys are going to be able to survive this period, is that
they do have some cash reserve built up that they can draw on to supplement those cash
flow deficits that we're projecting.
Turning to cotton farms, we've got Texas, Arkansas, Tennessee, North Carolina, Georgia
and Alabama.
Cotton farms.
And looking here at cotton prices, FAPRI has them coming back up a little bit here towards
the outer years.
Nothing like what we saw back here in 2011, but they are looking a little better than
what we had in 2014, 2013.
In terms of the baseline projection, overall, comparing from year to year, a really bad
year for cotton was 2015, January baseline.
2016 wasn't much better.
But now we're looking a little bit better with the higher prices in December of '17.
And if we look on specific farms, these are Texas Southern Plains cotton farms just south
of Lubbock.
They start out pretty good, but the inflation just overwhelms them over time and they got
up to more than a 50% cash flow deficit probability by the time we get to 2022.
Our eastern Caprock farm, a little better yields.
One of the things that has helped farms in Texas in these early years is we had really
good yields this past year, 2017.
And that has helped that cash flow on some of these farms.
The lower valley farm here, TXCB is a recipient of that good yield.
We had Harvey come through, the coastal bend area, and we thought that was going to adversely
affect the cash flow and the yields, but the cotton was in pretty good shape.
It was pretty well harvested by the time Harvey came along.
It was very spotty, the panel members we had were lucky farmers, is the only way to say
it.
They didn't show us any yield losses.
What minor yield losses they had, they were kind of ashamed of them because their neighbors
had really bad losses.
One guy said all he lost was a couple of sheets of sheet iron off his barn and a neighbor
down the road had a couple modules blown completely away.
So it's risky out there, we all know that.
Our Arkansas farm here looks really good, a 6% of a cash flow deficit at the beginning
of the period.
6% at the end.
Virtually zero chance of losing real net worth over that period.
Let's turn to rice.
As you know we have several rice farms in Arkansas.
We picked up one in Mississippi recently and Louisiana, and Texas, and, of course, California.
The projection here from FAPRI looks like this
It's got rice prices in the $11 and 1.5 range.
Substantially below the $14 reference price.
So here is what the outlook compared year to year is here.
In January '14 we had a little over 40% of farms in red, about 35% of them.
In green, looked a little better.
The next year we got rid of yellow farms and they became red or green.
2016 was the best we looked at in the last few years with 60% of farms in the green and
only about 28% of them in the red.
This December baseline looks pretty bad.
There's not a green farm there.
So when we get to this page, we're not going to be really surprised.
There's no green in this column for overall economic viability.
High probabilities of cash flow deficits here.
All we can hope for is that these prices that FAPRI has projected is actually going to come
above the reference price.
Cost of production is pretty high in rice.
Relative to that reference price.
And that's -- the farmers are depending on that PLC payment to even get these cash flow
deficits that we're showing here.
Looking at the Arkansas farm, here we've got 50% cash flow deficit in '17.
Most of the farmers there have probably seen exactly that type of situation.
About half of them had a cash flow deficit, meaning they didn't generate enough income
to pay off their operating loan fully this year.
Looking at the best one we've got is this Arkansas farm here down in Hoxie that has
a deficit.
So I dropped the dairy and the beef cattle, but since it was on the slide title, I'll
go through it briefly.
We've got dairy farms scattered around the country.
One thing I should point out here, Bobby, is that when we started this project back
in 1988, we wondered where we would put the representative farms, so we sat down with
the chief economist on House and Senate Ag Committee at that time and those people have
all retired, so I can say nearly what I want to about them, but I think Bob Young was on
the Senate side and Chip Connelly was on the House side at that time.
And we just asked, where would you like to have these representative farms?
And they just immediately went out there and circled around these states in the representative
farms.
So that's how we got them.
Dairy looks really good right now.
'14-'15 was the best we had seen for dairy for years.
'16 was not quite as good.
December '17 baseline looks a little worse than it did in January of '16.
And it's really by size category.
The smaller dairies under 675 cows have a cash flow problem, much greater than the farms
that are larger than 675.
And you can see here that it's scattered across the board where they're at.
The California farm looks pretty good here.
Washington farm, this is up in Bellingham, Washington.
The small looks really bad.
The large one looks good.
It comes on down here, Texas Central Dairy versus East Texas Dairy.
This east Texas dairy is partial grazing dairy, not doing quite as well.
But that's the outlook on that.
For camp operations we have the western part of the country a little central in Missouri
and a Florida farm/ranch.
The Florida ranch probably will be dropped because we're not getting interest in updating
that farm.
We've got two of them out here in Nevada.
These are all on public lands, very interesting operations.
You've got questions, you can call me and we can talk about them.
But these are ranches that we've been monitoring for quite some time.
And it looked really good here for a while.
2015 looked great.
We all had those high cattle prices and thought things were going to be rosy forever, but
nothing good ever lasts for ag economists.
We seem to ruin every good thing that we've got.
And right away, January baseline, we've got a high probability of cash flow deficit, 50%.
And now in December it looks even worse.
And this is what it looks like specifically on the farms.
So we've got a lot of cash flow problems here for the cow cap operations in Montana, Wyoming,
Colorado, New Mexico, South Dakota, Texas and Texas.
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