Is Wisconsin facing a 1980s-style farm crisis?

Despite the lowest milk prices in two decades, state farmers probably won’t see a repeat of the financial crisis of the mid-1980s – at least not this year, according to Bruce Jones, an economist at the College of Agricultural and Life Sciences. Milk prices account for more than half the cash receipts of Wisconsin farmers, and the low prices are putting more and more farms under financial stress. Unless milk prices improve, the state’s farm economy could face big problems in coming years, he says.

Jones and other specialists review the problems facing Wisconsin’s dairy industry in “Status of Wisconsin Agriculture, 2001,” published by the Department of Agricultural and Applied Economics.

While milk prices remain low, land values are rising and interest rates are moderate. This contrasts with the mid-80s, when land values plunged and interest rates soared, Jones points out. While many dairy farmers endured negative cash flows throughout 2000, rising land values have rescued many farmers’ balance sheets.

As of 1998, Wisconsin farms had only 22 cents of debt per dollar of farm assets, well below the .70 value that lenders set as the upper limit for farm borrowers. The favorable debt-to-asset ratio allows farmers to borrow to offset cash-flow problems for the short term. Over the longer term, however, borrowing is no substitute for income.

With farm incomes depressed, farmers are cutting back on investments in facilities and equipment, but borrowing more for the operating credit they need to offset operating losses and cash-flow deficits. Increased demands for operating credit will exceed the cutbacks in demand for capital credit, Jones says, so total borrowing by farmers will probably increase in 2001.

“Over time, farmers’ use of credit has increased dramatically relative to net farm income,” he points out. “This indicates that farmers’ ability to service their debt commitments is declining. This can’t continue indefinitely. Lenders won’t continue to loan money if farm incomes don’t rise to allow farmers to retire their debts in a timely manner. If lenders clamp down on new loans, farmers will have to sell land and other assets to repay existing debts or fund day-to-day operations. While this will solve short-run capital problems, it will further depress the state’s farm economy and force even more farmers to leave the business.”

Dairy marketing specialist Bob Cropp expects milk prices to recover slowly in 2001 from record lows in 2000. Wisconsin producers might see an average all-milk price of $12.40 per hundredweight for the year, he says. That’s up from an estimated $11.58 for 2000, but far from the record $15.50 in 1998.

Commercial disappearance was strong in 2000, but the increase in milk and dairy product production was greater, resulting in a build-up of dairy stocks. “Not until stocks, particularly cheese, are reduced will farm-level milk prices improve,” Cropp says. He expects the increase in milk production to slow this year. With continued growth in commercial disappearance, stocks should decline slowly and strengthen 2001 milk prices.

High milk prices and relatively cheap feed in 1998 and 1999 encouraged dairy expansions, particularly in the West, according to Cropp. Cow numbers increased by 128,000 last year in Western dairy herds, while numbers declined by 25,000 in Wisconsin and Minnesota. Low milk prices should stifle herd expansions this year, and Cropp expects nationwide cow numbers to stay the same, at about 9.22 million.

Overall, farm input prices will rise about 5 to 10 percent in the coming year, Jones predicts. Fuel and fertilizer costs are the big unknowns right now – they’re going up, but nobody knows how high. OPEC production cutbacks will make gasoline and diesel fuel more expensive, and high natural gas costs have jacked up the price of anhydrous ammonia. Many farmers will probably switch from anhydrous to urea as a nitrogen source, also driving up the cost of urea, Jones says.

The high nitrogen costs will probably make many farmers plant more soybeans and less corn this year, strengthening corn prices and weakening the bean market, according to CALS economist Randy Fortenbery. Five years of good to excellent crops have driven down the prices of corn and soybeans. For the 2000 crop, growers will see, about $1.80 per bushel for corn and $4.65 for beans – one-third lower than prices during 1995-1997. However, government payments, such as transition payments, loan deficiency payments, and market loss assistance, should add about a dollar a bushel to the prices U.S. growers receive.

The livestock market improved in 2000, with choice steer prices about $4 per hundredweight over 1999, and barrows and gilts up more than $10 per hundredweight, according to CALS economist Patrick Luby. Poultry and egg prices were unchanged. For 2001, producers should see cattle prices $3 to $8 higher, Luby says, while hog prices will fall $1 to $4. Poultry products will also show slightly lower prices.