Economy Looks Bleak, But Where Does The Ag Industry Stand?

The American Farm Bureau Federation (AFBF) said the U.S. financial crisis could moderate global and domestic demand for U.S. farm products and intensify an already volatile price situation for both commodities and the supplies that farmers must purchase, USAgNet reports. According to the analysis prepared by AFBF economists, overall they said the U.S. agricultural balance sheet is very strong.

“The fallout from the general financial malaise is being felt worldwide, especially in countries that may be already facing slowing economies due to the high price of energy,” according to AFBF Economist Terry Francl, one of the authors of the analysis. “This will most likely moderate the demand for agriculture products and ingredients, reduce the demand for U.S. agricultural exports and ultimately affect U.S. farm prices. Likewise, a slower domestic economy would also weigh on the demand for farm commodities and prices.”

Francl said the USDA is still projecting record high farm income in 2008. Another measure of economic health in farm country, debt-to-asset ratio, is at a modern low of 10%. The analysis did say that within the U.S., the credit supply is being impaired, which affects the cost of credit. This crunch is already affecting some agribusinesses, as reflected by recent developments in the fertilizer sector, Francl said.

The report also notes that spillover effects influence farmers’ commodity sales to elevators and processors. Farmers are not being asked to provide more credit, but are being offered a lower price for their crops, generally due to the higher basis, which is the difference between the futures price and the local cash price.

“The net impact of either the higher cost or lower prices is the same — less income for farmers,” Francl said. “There are many factors other than just credit availability affecting the returns to U.S. agriculture, but the current financial instability simply serves to exacerbate the already volatile input/output price situation. So the sooner action can be taken to stabilize the credit market the better it will.”