y now, the fact that the current low commodity prices have created crisis situations for some individual farmers is not news to anyone. It's a situation that Dr. Chuck Moore, associate head and Extension leader in the department of agricultural and resource economics, calls "cash-flow stress." He defines that as a condition in which low commodity prices for most of the crops and livestock grown in North Carolina and reductions in tobacco quotas are making it difficult to pay the bills. Normally, when one commodity brings low prices, others will carry the farmer through difficult times. But not this year.
Moreover, many farmers and agribusiness professionals are concerned that if low commodity prices continue, then cash-flow stress can erode farm equity and ultimately lead to an all-out financial crisis for some individual farmers.
How agriculture came to experience this cash-flow stress is complicated, and there are a number of factors contributing to this year's low prices. When it will end, no one can say for sure.
The Freedom to Farm Act of 1996 gave farmers something they had long wanted: the chance to get the U.S. government out of farming. The act gave farmers the flexibility to grow crops that would return the highest profits without government restrictions on quantities. Such restrictions traditionally have served as price supports.
But as Moore points out, the act placed new responsibility on farmers for managing their own risk and for planning for lean years.
Ironically, the current U.S. budget surplus and election-year goodwill, said Moore, have encouraged Congress to increase financial assistance to farmers. Payments of various forms have been approved to bail agriculture out of its current slump.
"This year's net income, minus government payments, looks like a crisis. But when one accounts for the government payments, farmers might come out about the same as they did last year," Moore said.
In this economic climate, some farmers will fail. Others will capitalize on the situation and actually will make money.
Significantly, the Freedom to Farm Act emphasizes the need for farmers to become better managers, according to Dr. Arnie Oltmans, Extension specialist in the department of agricultural and resource economics. "The bottom line with what's happening now underscores the need for farmers to manage, manage, manage," he said.
Good management practices include controlling debt, marketing crops wisely and watching commodity prices to get the best price for a crop. Buying crop insurance and futures options, contracting and hedging one's cash are all ways that farmers can manage their price risk in a given commodity.
Another contributing factor is that in 1996, other parts of the world experienced poor climate conditions, leading to decreased production of essential foods. To fill the void, other nations turned to U.S. agriculture. As a result, U.S. farmers earned unusually high prices for corn, wheat and cotton.
The Freedom to Farm Act encouraged farmers to plant more of these commodities to capitalize on the high prices of 1996. But in 1997 and 1998, Asia's poor economy resulted in reduced demand for U.S. exports and left large surpluses of many U.S. commodities sitting in storage. Until those surpluses come down or demand rises, prices cannot recover.
"When you have that much supply on hand, what's going to happen to the price? It's going to go down," Moore said.
Finally, uncertainty surrounding tobacco, North Carolina's top cash crop, has further added to economic turmoil facing the state's farmers. Since 1997, the retail price for a pack of cigarettes has increased by 50 percent, largely due to settlements and litigation. This increased cost has led, in turn, to lower consumption of cigarettes, which could translate into a total annual loss of as much as $1 billion to $2.5 billion to North Carolina's economy, Moore said.
Reduced consumption of tobacco in the form of cigarettes also has reduced the amount of tobacco that farmers can grow. Tobacco companies usually keep on hand supplies for 18 to 24 months of cigarette manufacturing. But reduced cigarette consumption has caused companies to purchase less. Therefore, over the last two years the U.S. secretary of agriculture reduced the quota of tobacco that farmers can grow by more than 30 percent.
"The quota decline will make 1999 a very difficult year for flue-cured tobacco farmers and agribusinesses that serve them," Moore said. "Tobacco farmers have never worried much about other commodities because tobacco always paid the bills. This year, that is not the case."
In addition, there are pressures to change the tobacco program, which limits supply and has guaranteed good profits for growers. Moore estimates that eliminating the tobacco program would cause a decline in tobacco prices of at least 25 percent.
hen agriculture experiences cash-flow stress like the current situation, the ripple effects are felt across society. Oltmans said that while urban areas that rely on many different types of business will not feel the brunt of the cash-flow stress, rural areas will be hit harder.
"In Pasquotank County, where corn and soybeans make up most of the income, this is a drastic situation," he said.
Though the impact of this stress will vary across the state, North Carolinians feel that farmers make an important contribution to society and worry about the loss of family farmers, according to a survey by two N.C. State University sociologists.
Last year, Dr. Tom Hoban and Dr. Bill Clifford conducted a survey to determine how citizens and leaders feel about agriculture and followed up by talking with focus groups more closely to probe public opinion.
"Our survey showed that citizens hold farmers in very high esteem and feel they contribute greatly to our economy," Hoban said.
Citizens showed a great awareness of many issues facing farmers, such as the low commodity prices and drought conditions that devastated some crops this summer. Urban citizens in particular were concerned about losing farms.
"In our Raleigh and Charlotte groups, people worried about the loss of farms, of open space and the pastoral scene of farms and fields. People don't want to lose farms for a lot of development," Hoban said.
Economists Moore and Oltmans can't gaze into a crystal ball and predict what the future will bring for farmers. It will depend on when the world economy becomes strong again and Asian countries begin to increase their imports. It will depend on weather conditions and whether another part of the world experiences a major crop disaster. And in this state in particular, it will depend on what the future holds for tobacco.
"We could be out of this in a year or two, or it could take longer," Oltmans said. Environmental regulations that add costs for farmers will also play a role in recovery. Cash-flow stress could cause some farmers to take cost-saving shortcuts in environmental regulations. Conversely, the environment would benefit if farmers used fewer fertilizer and pesticide inputs to save money. "This is a crisis of confidence for agriculture," he said. "We're not sure what the future will hold."
It remains to be seen whether farmers will continue to benefit from Congressional cash supports, which ironically seem to defeat the purpose of Freedom to Farm, Moore said.
"All is not lost," he said. "There will be survivors, and there will be some who fall out, but not just because of low commodity prices."