Farm Income is Down: One Economist's Advice

By Julie Murphree, Arizona Farm Bureau Communication Director: U.S. farm income fell by 38% between 2014 and 2015 and is forecast to fall by another 3% this year reminding us that farm income is volatile and commodity price spikes don’t last for long. Reviewing the dramatic swings of our industry, a U of A economist speaks to the present and future.

Editor's Note: This article originally appeared in the April 2016 issue of Arizona Agriculture

Professor and Extension Specialist in the Department of Agricultural & Resource Economics for the University of Arizona, George Frisvold, Ph.D., wholeheartedly engages in conversations about Arizona agriculture and economics as they relate to our industry. He’ll help you understand the numbers and give you a broad perspective on economic issues. In fact, the non-numbers person might even walk away from a conversation with him embracing the numbers, at least understanding them better.

Frisvold suggests the brightest future is going to be in vegetable and other specialty crop production in Arizona. In fact, he says, “Arizona is one of the best places in the world to do it and Arizona growers are really good at it.”

Dr. Frisvold joined the faculty at The University of Arizona in 1997. He came to us with an impressive record of experience. For example, he has been a visiting scholar at the National Institute of Rural Development in Hyderabad, India, a lecturer at The Johns Hopkins University, and Chief of the Resource and Environmental Policy Branch of USDA's Economic Research Service.

 His research interests include domestic and international environmental policy, as well as the causes and consequences of technological change in agriculture. In 1995-96, Dr. Frisvold served on the senior staff of the President's Council of Economic Advisers with responsibility for agricultural, natural resource, and international trade issues. He is a co-editor of the Journal of Water Economics and Policy.

In the meantime, farmers and ranchers are talking about the costs to grow crops or raise animals and how the depressed prices are a tremendous concern. 

 Arizona Agriculture asked Dr. Frisvold to give us a perspective on U.S. Farm income and the serious decline it’s taken in the last few years.

 Arizona Agriculture: The USDA says that U.S. Farm income in the aggregate will be down again in 2016 after large declines in 2015. How do we sustain profits in our farm and ranch businesses with these conditions in agriculture?

 Dr. Frisvold: According to the USDA Economic Research Service, U.S. net farm income fell by 38% between 2014 and 2015 and is forecast to fall by another 3% from 2015 to 2016. Keep in mind, though, that 2011 to 2014 saw record highs for farm income. Farm income is volatile and commodity price spikes don’t last for long. While farmers don’t like to see incomes fall, a downturn after four record-setting income years, unfortunately, isn’t that surprising. Federal farm program payments rose by about $1 billion in 2015 and are forecast to rise by another $3 billion in 2016. That helps, somewhat but the rise in payments is not keeping pace with the fall in market returns. When cash receipts are down, farmers can try to economize on inputs. Fuel and feed expenses are down, but labor costs are rising as the overall economy is improving.

Arizona Agriculture: What does this mean specifically for Arizona agriculture?

Dr. Frisvold: USDA doesn’t report state-level forecasts, but makes forecasts by larger regions. Arizona is split between two regions where farm income is forecast to fall by 2%-5% in 2016. Unfortunately, farm income is down because agricultural commodity prices are falling across the board. It isn’t just one or two commodities. Cattle and calf prices are down, dairy prices are down; same for cotton and wheat. Vegetable and melon prices are also forecast to be down in 2016. So, weak prices are hitting nearly all of Arizona’s main agricultural commodities. Rising labor costs can be an issue because Arizona agriculture is more labor-intensive than many other parts of the U.S.

Arizona Agriculture: Are some agriculture commodities more susceptible than others and if so which ones?

Dr. Frisvold: Nearly every major Arizona commodity is susceptible this year. USDA’s longer range forecasts for wheat and for cotton prices suggest those prices will start to recover, but there is a lot of “noise” in those forecasts. Market projections for vegetables, melons, and nuts are fairly bullish. Given California’s water supply problems, Arizona has the potential to capture a bigger share of these markets in the future. Beef prices hit records in 2014. Longer-term, USDA forecasts prices moving slowly downward from those highs, but even these lower forecasted prices are well above USDA’s forecasts from just five years ago. Dairy prices are not forecast to rebound until 2020 or later.

Arizona Agriculture: What do Arizona farmers and ranchers need to do to hedge against these more challenging economic times?

Dr. Frisvold: Hopefully, farmers saved some of the extra income from the recent good years. Canada has a tax-deferred savings program for farmers where the government provides a match – something like the employer match in people’s 401(k) retirement accounts. This creates incentives to save during good times to ride out the bad. Unfortunately, we don’t have these types of programs in the U.S. In principle, farmers can diversify and switch to more profitable commodities, but that strategy is less effective when prices have fallen across the board as they have this year. Farmers can rely to some extent on off-farm income. More than half the farm households in the U.S. have more than $70,000 in non-farm income. Farms can enter into forward and futures contracts to hedge against price risk and there also a variety of federally-subsidized crop and revenue insurance products they can access. A problem with federal crop insurance programs, though, is that they were not developed and designed with Arizona production conditions in mind. So, for example, Arizona cotton and wheat growers do not benefit as much from crop insurance programs as much as growers in other states. Finally, growers can keep abreast of the newest methods and technologies to control costs.

Arizona Agriculture: One commodity, cotton, has had poor commodity prices for a few years now. Does cotton still have a place in the Arizona agriculture mix and why?

Dr. Frisvold: In 2011, prices received for Arizona upland cotton averaged more than 87¢ per pound. In 2015, it was about 63¢ per pound, a drop of over 27%.  Upland acreage has fallen a lot in recent years. Unfortunately, cotton prices are projected to fall in 2016. A concern is if cotton production falls below a critical level so that it becomes difficult to support local gins. Pima cotton acreage has come up in recent years, though. One of the goals of the largely successful Pink Bollworm Eradication Program was to help bring Pima cotton production back to Arizona. With near complete eradication in Arizona, we may be seeing the beginnings of this. I think cotton will continue to have a place in Arizona agriculture. We still have some of the highest cotton yields in the world. We also have ideal climate conditions for growing out cotton seeds to supply to the seed industry. This is a niche that Arizona can continue to fill. Arizona cotton is in better shape than California, which is facing greater water supply problems.

Under the current farm bill, producers are eligible for insurance payments under ARC (Agriculture Risk Coverage) or PLC (Price Loss Coverage) programs. While “other oilseeds” are eligible for payments under these programs, cottonseed was not explicitly listed as eligible. The House Agricultural Committee Chair, Michael Conway, has asked the Secretary of Agriculture to consider cottonseed be considered as an “other oilseed” for the purpose of payment eligibility. Secretary Vilsack, though, has argued that he does not have authority under the farm bill to do so. Sides are continuing to argue back and forth on this. I am not a lawyer so can’t speak to what can or cannot be done. But, I will point out that cottonseed and cottonseed oil are included in official USDA reports, statistics, and forecasts for oilseeds. I think a sticking point is where the money would come from if cotton producers were to become eligible.

Arizona Agriculture: What might University of Arizona and extension tell young farmers, especially when establishing their agriculture businesses, to prepare for uncertain economic times? Certainly during budgeting times.

Dr. Frisvold: Be very careful about how you manage debt. The mid-1980s was another time of low agricultural prices. Farmers then had a lot more debt going into that bad patch and it was devastating to many farm families. Since then, farmers in the U.S. have been relatively conservative taking on debt. USDA statistics suggest that over the past decade farmers could have taken on a lot more debt than they actually did. But when the recession hit and people were questioning the true value of certain assets, farmers were in a much stronger position because they were less indebted than many U.S. households and they were producing valuable and tangible products.

Times of good prices never last very long in agriculture. There is always a downturn after a few years. So, run scenarios for your farm or ranch. How would you weather a year of bad prices? Two to three years?  There are more financial planning tools (and even Excel!) that you can use to go through “what if” scenarios.

Even if you are young, start retirement and estate planning. Far too few Americans are saving adequately for retirement. Especially because farm income is so volatile and tax implications are important, you need to plan early and often.

Some measures like being meticulous to protect food safety or prevent pest or weed resistance cost extra in the short run. But consider the costs to your business of a food safety scare or resistant pests or weeds. It’s a bit like maintaining your truck. If you don’t do it, you’re going to have higher costs later, often at a time when you can least afford it.

Arizona Agriculture: Do you see a bright or challenging future for up-and-coming farm and ranch families in Arizona? Explain?

Dr. Frisvold: Farming is always challenging. That’s a pretty safe prediction. I think the brightest future is going to be in vegetable and other specialty crop production. Arizona is one of the best places in the world to do it and Arizona growers are really good at it. I have played around with different economic models where you can simulate certain “shocks” to agricultural industries. I ran some scenarios with massive water shortages in the Southwest and Yuma vegetable and melon production doesn’t budge. That area is going to be an international center of food production far into the future. Because California has more severe water shortage problems, I think there is potential for expansion in Arizona. In Pinal County, I see another major agricultural area sitting right between two large metro areas – Phoenix and Tucson -- with 5.5 million people. Those areas are projected to grow by a million people over the next 10 years and another million 10 years after that. That’s a big potential market. So there’s potential for specialty crop and dairy production to feed that growing population. A shift to more specialty crops involves shifting production practices and new labor management issues. Older growers may not want to make such shifts, but there might be potential for younger farmers. Aside from labor management issues, there will be potential water supply issues in Central Arizona depending on Colorado River water supplies. For traditional commodities, I think focusing on quality and niche markets rather than focusing primarily on yields and bulk production will become more important. Ranching is always going to be challenging. Because grazing lands are so important, ranching is really the only “rain-fed” agriculture in the state and it is vulnerable to fluctuations in weather. I think there is a promise that advances in information technologies can help ranchers manage weather risk better, but I don’t think we are there yet.  

Arizona Agriculture: What else can you share that can help someone build their business around economic forecasts?

Dr. Frisvold: First, there is just so much more economic data available at your fingertips through the Internet than 30 years ago. So, in principle, it is much easier to stay informed. That said, only about a third of Arizona farmers report using a computer for their farm business while about a third of Arizona farmers do not have internet access.  I have a young, bright graduate student working on agricultural computer and internet use and he was floored that these numbers for non-use are so high.  We’re just starting to look at this, but the Four Corners area of the Southwest has lower internet access for farmers. So one thing we are looking into is to what extent there is a “digital divide” between Indian farmers and other farmers in the Southwest. Farmers tend to be older on average, which may also be a factor. That said, my Dad was on the internet all the time back in the early “dial-up” days and he started when he was in his late 70s.

Second, if you are using the internet, the issue quickly becomes one of quality versus quantity. There is a lot of economic data and forecasts and attempts to “interpret” data out there. But if you are looking at a website, how do you know if you can trust the information. Personally, I look to see if sites end in “.edu” (universities) or “.gov” official government statistics. Even here, you have to be careful because different agencies report data in different ways. You can get very different numbers for what you think is the same thing, depending on where you look.  There are also private services that do their own forecasting and some of these are quite good too. I would say, don’t take any single number at face value without cross checking other information sources – especially if you are using it to make production or investment decisions. With the internet, there is a lot of information and advice out there, but a lot of it is bad.

Banks, farm groups, and commodity groups often host outlook forums. So, go to those and don’t be afraid to ask hard questions. In my experience, though, growers aren’t too shy about asking questions. Personally, I like to look up Congressional testimony from USDA’s Office of the Chief Economist. These are available online, the USDA economists are on the hot seat, and Representatives and Senators are busy people, so the briefing materials get to point right away.

Arizona Agriculture: In evaluating the economics of Arizona agriculture, what should excite us about our state … especially considering that our Dean considers us a “Nutrition state?”

This video lets you know why many consider Arizona a "Nutrition state"

Dr. Frisvold: For those unfamiliar with the term “nutrition state” Shane Burgess, Dean of the University of Arizona College of Agriculture and Life Sciences has pointed out that if you just ate foods produced in Arizona, you’d be really healthy. We have meat, milk, fruits, vegetables, grains, even some aquaculture. That’s a really balanced, nutritious diet.

As Arizonans (and Americans) age, we are seeing staggering increases in certain preventable health costs associated with diabetes, high blood pressure, heart disease, and osteoporosis. Better nutrition is one of the lowest cost and effect ways to prevent these problems. When people compare the economic contribution of agriculture to Arizona (we did analysis placing this in excess of $17 billion), that figure does not include the economic benefits of improved health from better nutrition. So agriculture may come off as looking small compared to other industries in the state, but agriculture and nutrition’s role in reducing health care costs and improving the quality of people’s lives are enormous.

Arizona Agriculture: With all these exciting considerations about Arizona agriculture’s future, what area is our “cautionary concern?”

Dr. Frisvold: Water. Is there going to be a shortage declaration for the Colorado this year and what does it mean for agriculture?  Quick answer: things look a little better for 2016 than it did a few months ago, but there is still a lot of uncertainty about 2017 and beyond. Farmers relying on CAP water should keep an eye on this, especially as our recent, low energy prices start to rise over the next couple of years (energy prices affect groundwater pumping costs). In the north and east of the state that relies on groundwater, how are we going to balance economic and population growth with water for agriculture?  We’re quickly starting to get into issues that could take up an entire article. I don’t have the answers, but agriculture is going to be at the center of groundwater management issues in areas outside the major agricultural production areas of the state. Other questions could be about food and agriculture beyond the farm gate. Computers and electronics are Arizona’s largest manufacturing industry, transportation equipment is second. Food and beverage manufacturing is third. There has been a lot of talk lately about the loss of manufacturing jobs in the United States. Many of these food manufacturing jobs pay pretty well, especially for people in supervisory positions. So, agriculture in the state is more than just what happens on the farm or ranch. It is an entire system, linked to other key downstream industries and human health.

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