Cal­i­for­nia farm­ers must rely on di­ver­sity, re­siliency

Porterville Recorder - - OPINION - Matt Clark is a se­nior in­dus­try an­a­lyst for Amer­i­can Ag­credit in Santa Rosa. Reprinted with per­mis­sion of Cal­i­for­nia Farm Bureau Fed­er­a­tion.

U.S. farm in­come con­tracted some­what in 2018, ac­cord­ing to the most re­cent United States De­part­ment of Agri­cul­ture up­date, re­leased Nov. 30.

The re­port in­di­cated that net cash in­come in 2018 de­clined 10 per­cent from the pre­vi­ous year to about $93.4 bil­lion, the low­est net cash in­come since 2009. Strik­ingly, net cash in­come has de­clined 38 per­cent from the re­cent peak in 2012, when many in the agri­cul­tural in­dus­try ex­pe­ri­enced a pro­tracted pe­riod of ex­cep­tional profit mar­gins. Only one other time pe­riod, the mid-1970s, has sus­tained a sim­i­lar de­cline.

The de­cline in farm in­come from the pre­vi­ous year was a re­sult of both a de­cline in gross cash re­ceipts and an in­crease in pro­duc­tion ex­penses. For ex­am­ple, gross cash re­ceipts for agri­cul­ture fell less than 1 per­cent from the pre­vi­ous year. Di­rect farm ex­penses, such as la­bor, feed, fer­til­izer and chem­i­cals, in­creased more than 2 per­cent. Other farm ex­penses also in­creased slightly, adding to the profit-mar­gin squeeze.

How­ever, due to strong bal­ance sheets built dur­ing the run-up in farm in­come, the ag­gre­gate U.S. farm sec­tor re­mains in ad­e­quate fi­nan­cial shape—though tighter than pre­vi­ous years, by sev­eral mea­sures.

First, sol­vency mea­sures such as debt-toas­set and debt-to-eq­uity ra­tios, while see­ing a mod­est re­cent rise, re­main well be­low lev­els ob­served in the last farm cri­sis.

For in­stance, though above the his­toric lows of the early 2010s, debt-to-eq­uity re­mains be­low lev­els ob­served from 1962 through 2003, a 41-year pe­riod.

Sec­ond, liq­uid­ity mea­sures have tight­ened but also re­main above the wa­ter line. The USDA es­sen­tially re­ports that the ag­gre­gate cur­rent ra­tio re­mains in pos­i­tive ter­ri­tory, though down sig­nif­i­cantly from the peak years.

The de­cline in liq­uid­ity likely also ex­plains the slight uptick in debt lev­els; the USDA has es­ti­mated an ag­gre­gate debt load in­crease of less than 2 per­cent from a year ago.

Fi­nally, delin­quency rates for non-real es­tate farm loans also re­main his­tor­i­cally low. Ac­cord­ing to the Fed­eral Re­serve Bank of Kansas City, the delin­quency rate for agri­cul­tural loans held at com­mer­cial banks cur­rently sits around 2 per­cent, up slightly from the val­ley ob­served in 2012 though still be­low re­cent av­er­ages.

In Cal­i­for­nia, the largest con­trib­u­tor to the na­tion’s cash farm re­ceipts, the out­look is some­what mixed and de­pends heav­ily on re­gion and in­dus­try.

Ar­eas im­pacted by fires are un­der­stand­ably ex­pected to ex­pe­ri­ence a step back in farm in­come. Drought has also been a fac­tor in sev­eral key pro­duc­tion ar­eas, with 2018 show­ing no signs of im­prove­ment.

In fact, the Na­tional Oceanic and At­mo­spheric Ad­min­is­tra­tion es­ti­mated that from Jan­uary to De­cem­ber, Cal­i­for­nia’s acres show­ing signs of drought in­creased 48 per­cent.

In ar­eas un­af­fected by fire and drought, gross cash re­ceipts ex­pec­ta­tions vary by spe­cific in­dus­try but in gen­eral look to be stable or slightly down from the pre­vi­ous year.

As an ex­am­ple, USDA es­ti­mates gross cash re­ceipts for the dairy in­dus­try to be down 9 per­cent from the pre­vi­ous year but es­ti­mates poul­try re­ceipts to be 7 per­cent higher. Af­ter sev­eral years of strong pro­duc­tion, gross re­ceipts for tree fruit and nuts are ex­pected to be slightly lower. Like­wise, veg­etable gross re­ceipts are ex­pected to be down slightly, though con­sump­tion re­mains stable.

Sim­i­lar to the broader farm econ­omy, pro­duc­tion ex­penses for Cal­i­for­nia also in­creased, with the cost of la­bor of par­tic­u­lar con­cern.

In Napa and Sonoma coun­ties, key wine­grape pro­duc­tion ar­eas, un­em­ploy­ment in 2018 has hov­ered near 2.5 per­cent, at his­toric lows. In other large agri­cul­ture-cen­tric coun­ties such as Fresno, Madera, Merced and Stanis­laus coun­ties, the la­bor mar­ket also tight­ened.

For ex­am­ple, in Oc­to­ber the Bureau of La­bor Statis­tics es­ti­mated un­em­ploy­ment in Fresno County was 6.3 per­cent, down from 2016 and 2017 lev­els of 9.0 and 7.2 per­cent, re­spec­tively.

Over­all, Cal­i­for­nia agri­cul­tural pro­duc­ers faced mul­ti­ple chal­lenges from fires, drought, trade is­sues, la­bor con­cerns, wa­ter rights is­sues, height­ened sup­ply and more in 2018. Piec­ing these parts to­gether, fi­nal 2018 profit mar­gins will likely be tighter than the pre­vi­ous year.

How­ever, Cal­i­for­nia farm­ers and ranch­ers have proved to be re­silient over the years, in part due to the state’s very di­verse com­mod­ity base. This di­ver­sity is ex­pected to con­tinue help­ing Cal­i­for­nia over­come many of the re­cent chal­lenges and keep it at the top of the agri­cul­tural-re­ceipts list for all U.S. states.

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