Georgia Farms

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					                                                                         financial outlook

Georgia Farms
Dr. Cesar L. Escalante (, Department of Agricultural and Applied Economics

Economic activity in the farm sector, which          Figure 1 plots the total value of farm                                           Farm real estate prices are also influenced
has experienced a number of successive            production and net farm income of Georgia                                        by lessened demand for recreational land.
good, productive, profitable years in the past,   farms over the last 10 years. Based on the                                          At the beginning of 2009, Georgia
slowed down with the rest of the economy          trends in the graph, value of farm produc-                                       croplands and pastures were estimated at
as 2009 ushered in a period of economic           tion and net farm income have consistently                                       $4,120 and $6,400 per acre (USDA). This
recession. This recession is characterized        increased over a three-year period before                                        represents declining rates of 9.3 percent
by substantial credit crises, worsening           dipping slightly in 2009. The decline in 2009,                                   for croplands and 14.1 percent for pastures
unemployment and a surge of corporate             however, only resulted in a slight change in                                     over January 2008 levels. Irrigated and
bankruptcies. Civilian unemployment rates
for the country doubled to more than 10           Figure 1. Value of Farm Production and Net Farm Income of Georgia Farms, 2000 –2009
                                                                                                         Source: Economic Research Service, U.S.D.A.
percent from its 2007 level. Bankruptcy
filings rose by 35 percent nationwide over a
                                                                      9,000,000                                                                                       VGP
12-month period ending in June 2009. The                              8,000,000
                                                                                                                                                                      Net Farm Income
government was preoccupied with providing                             7,000,000
                                                   Million Dollars

rescue packages for vital, but ailing,                                6,000,000
economic industries.                                                  4,000,000
    Domestic recessionary forces combined                             3,000,000

with deteriorating global economic                                    2,000,000
conditions altogether weakened demand
for agricultural products. The producers are                                      2000    2001   2002   2003     2004      2005       2006       2007   2008   2009

now faced with fewer options for market                                                                               Year

expansion, leaving them to contend with
commodity and livestock prices lower than         the ratio of net farm income to value of farm                                    non-irrigated cropland prices decreased
anticipated when production decisions             production. It moved from 31.48 percent in                                       to $3,300 (from $3,600) and $4,350 (from
were made earlier in 2009. As a result, the       2008 to 30.34 percent in 2009, which notably                                     $4,750), representing reductions of 8.3
Economic Research Service estimates a 13          is still higher than the ratios calculated for                                   percent and 8.4 percent, respectively.
percent drop in combined crop and livestock       2006 and 2007.                                                                       During these times of economic contrac-
cash receipts for all U.S. farms in 2009. An          Preliminary 2009 estimates provided                                          tion, tighter credit, poor real estate investment
even larger drop in value of farm production      by the USDA Agricultural Statistics Board                                        prospects and greater economic risks,
cannot be mitigated by declining production       for average U.S. farmland prices were                                            farmland leasing stands out as a more practi-
expenses, which the farm sector experienced       $2,650 and $1,070 per acre for croplands                                         cal alternative. While share leasing dominates
for the first time since 2002. As a result,       and pastures, representing decreases of 4                                        available farmland control arrangements in
USDA estimates a 34.5 percent decrease in         percent and 1.8 percent, respectively, over                                      terms of risk mitigation, cash renting logically
net farm income for U.S. farms in 2009.           2008 prices. This decline breaks the trend of                                    offers the next best viable option. The national
    A reconstruction of Georgia’s farm profit     steady gains in farm real estate values, which                                   farm cash rent market in 2009 conforms
and loss conditions yielded a net farm            have been posted for more than two decades.                                      to this expectation as it performed well
income estimate of $2.6 billion in 2009.          This result, however, was expected as the                                        compared to the farm real estate market. U.S.
This number still lies above the state’s          overall tightening in economic activity                                          cropland cash rental rates posted a 5.3 percent
10-year median net farm income despite            led to diminished interest in commercial                                         gain to $4.50 per acre in 2009; pasture rental
a 6.4 percent drop from 2008 levels. These        and residential development in most                                              rates remained unchanged at $10.50 per acre.
numbers were determined using Georgia’s           areas in the country. In the farm sector,                                        In Georgia, irrigated cropland rent duplicated
farm enterprise diversification profile and       this is aggravated by a trend of declining                                       the trend by increasing from $125 to $140 per
available national estimates from USDA-           livestock and commodity prices in relation                                       acre, representing a growth rate of 12 percent.
ERS for year-to-year changes in factors           to previous year’s prices. This contributed                                      Non-irrigated cropland and pasture rents,
determining production revenues and               to less demand for farm real estate from                                         however, decreased to $45 per acre (from $48)
expenditures.                                     prospective producers and investors.                                             and to $22 per acre (from $27).

                                                                                         College of Agricultural and Environmental Sciences                                             5
    financial outlook
    Georgia Farms, continued

       Despite the strong depressing pressures                          Figure 2. Farm Debit and Equity of Georgia Farms, 1990                                                              –2009F*
    on economic activity, the U.S. farm sector’s                                                                    Source: Economic Research Service, U.S.D.A.

    balance sheet was still able to reflect                        45,000,000

    a fairly strong leverage and solvency                          40,000,000

    position in 2009. As a result of the decline                   35,000,000

    in property values, total farm assets of U.S.                  30,000,000

                                                       Million $
    farms posted a 3.1 percent decline in 2009
    to $1.94 trillion. Total farm debt remained
    unchanged in 2009 as farmers exercised                                                                                                        EQUITY
    caution in borrowing decisions. Farm equity
    also declined as retained earnings from                                                                                                                                      DEBT

    operations was reduced by declining farm                                     1990


















    cash receipts, decreasing production costs                                                                                                     Year

    (although not enough to mitigate output           * 2009 Forecast: USDA figures for GA until 2003; Estimates used thereafter.

    price decreases) and the net effect of farm
    profit decline.                                 only caused the debt-equity ratio to slightly                                             delinquency rate in the nation in 2009. This
       In spite of the drop in assets and equity    decrease from 0.1276x to 0.1322.                                                          is further supported by the fact 21 out of the
    levels, the U.S. farm sector still managed to      The Federal Open Market Committee has                                                  124 bank failures recorded until November
    produce a leverage ratio for 2009 of 0.1229x,   maintained the federal funds rate near zero                                               2009 operated in Georgia. This record tops
    which is still below the 20-year average of     percent and is expected to keep it that way                                               all other states, including Illinois with 19
    0.1332x and just slightly above the 10-year     for an extended period of time that may last                                              and California with 15 bank failures.
    average of 0.1159x. These debt-asset ratio      until the second half of 2010. With the inter-                                                Analyses of the financial health of com-
    levels reflect a prudent use of debt by U.S.    est rate adjustment mechanism almost fully                                                mercial banks indicate agricultural banks
    farms in financing farm investments and         exhausted, the Fed has resorted to buying                                                 seemed to be faring much better than their
    operations. This is one of the important        mortgage and government debt to continue                                                  peers. Save for a trimming of their profits,
    factors that shielded the farm sector           to stimulate more investment, credit and                                                  their overall performances continue to be
    from more debilitating effects of the           consumer purchasing activities. These                                                     relatively stronger than their larger banking
    economic recession.                             mechanisms to boost economic activity are                                                 counterparts. The favorable financial perfor-
       Georgia farms have duplicated such           expected to persist till early 2010.                                                      mance of these specialized lenders provides
    a feat in their balance sheets. Another            Weighted average farm loan interest rates                                              important implications on the quality of
    reconstruction of Georgia’s asset, debt and     in the Southeastern region have dropped                                                   the borrowers they service. According to
    equity levels (based on previous years’         from a high of 6.4 percent in the first quarter                                           the most recent statistics collected in the
    records and national growth trends in these     of 2008 to 5 percent as of the third quarter                                              Agricultural Finance Databook, the farmers’
    accounts) produced a debt-asset ratio of        of 2009.                                                                                  loan repayment ability seemed to remain
    0.1168x for 2009. This is below the 20- and        In 2009, lenders continued to tighten                                                  strong during the year owing to two major
    10-year averages of 0.1478x and 0.1290x.        their lending standards to prevent any                                                    indicators: much fewer agricultural banking
    Figure 2 presents the debt and equity levels    deterioration in the quality of their loan                                                failures relative to industry record in 2009
    accumulated by Georgia farms over a 20-         portfolios and provide adequate cushion                                                   and 0.4 percent net charge-offs as a share of
    year period from 1990. Debt levels have been    against operating losses, especially as a                                                 total loans issued by agricultural banks. This
    maintained at very low levels, in contrast to   result of loan payment delinquencies.                                                     is well within the 10-year average and well
    farm equity, which steadily increased until     This was especially relevant in Georgia as                                                below the rate posted by other banks. 
    2008. A slight dip in total equity in 2009      mortgage-holders posted the sixth highest

6     2010 Georgia Ag Forecast