Farm Belt Bounces Back

By SCOTT KILMAN , WSJ.com

Major agricultural commodities continued their extended run-up in price, underscoring how much of America's farm belt is booming even as the overall economy continues to struggle.
Contracts for the delivery of corn and soybeans into mid-2011 jumped Monday by 5% and 2%, respectively, after rising their daily permissible limits on Friday, when the U.S. Department of Agriculture sliced production estimates by small percentages. Cash cotton prices rose 3.3% Monday after a 3.9% gain Friday. They are 86% higher than a year ago.

For many crops, prices are climbing even as big harvests pile up, a rare combination. Farmland values are up while those for some other kinds of real estate languish. Debt on the farm is manageable. Incomes are rising.
And trade, of which many Americans are growing wary, is for agriculture a boon. Asia's economic vigor and appetites make the farm sector's reliance on exports—once thought a vulnerability in some quarters—a plus today.
"The farm economy is coming out of the recession far faster than the general economy," said Don Carson, a senior analyst at Susquehanna Financial Group, New York.

Overall, the USDA projects net farm income to climb 24% this year to $77.1 billion, the fourth highest ever. In September, farmers were being paid 62% more for hogs than a year earlier, and 32% more for milk.

The higher prices probably won't sting consumers at the dinner table as much as did a crop-price surge in 2008, when the consumer price index for food jumped 5.5%. With unemployment high and shoppers frugal, food executives are leery of trying to pass higher costs on. The USDA expects retail food prices to rise 0.5% to 1.5% this year, which would be the least since 1992, though some economists see these prices climbing 3% to 4% next year.

For taxpayers, higher commodity prices mean the government's cost of farm subsidies this year will fall to around $12 billion, about half the level in years when prices were much below targets set by Congress. Farmers this year are reaping about $4.8 billion in direct payments that aren't tied to market prices, as well as checks for such things as weather-related disasters and a land-idling conservation program.

Growers' improved lot is rippling out to other industries. The boom is mending even America's tattered cotton belt, and that means long-stressed cotton farmers can buy new machinery. Hurst Farm Supply near Lubbock, Texas says sales are up 20% this year.

"I will probably have to turn people away," says Joe Hurst, general manager, who plans to limit his sales of new cotton-harvesting machines so he isn't swamped with trade-ins.
Some of the price increases are from levels that were depressed by the financial crisis. For instance, the recession hammered demand for expensive cuts of meat, and therefore prices for cattle and hogs. Producers responded by thinning their herds. The resulting supply reductions helped set up today's higher prices.

In other words, the boom partly reflects the cyclical trends that continually whipsaw agriculture.
They could trip up the sector again. Surging grain prices could mute the recovery of livestock producers by raising their costs. Imponderables such as bad weather, a strengthening of the dollar or a politically inspired trade spat could send parts of the Farm Belt into the dumps.
But some of the forces lifting the agriculture economy today are powerful, such as the strength of Asia's appetite for commodities.

Asian economies are growing roughly three times as fast as America's, and their demand is bolstering U.S. farmers across the board. The USDA estimates farm exports climbed 11% during the fiscal year ended Sept. 30, to $107.5 billion, and forecasts a further 5% rise in the new fiscal year.

Analysts think a quarter of this year's U.S. soybean crop could end up in China. The U.S. government expects American wheat exports to soar 35% to $8.1 billion, partly because of the summer drought in Russia that knocked its farmers out of the export market.

Modest debt is another factor helping the farm economy. A debt crisis on the farm in the mid-1980s was so punishing that it dealt both operators and lenders a generation-long dose of caution. Farm debt, which had hit 28.5% of equity in 1985, now is just 13% of equity.
So while soured debt weighs on values in other forms of real estate, Midwestern farmland prices are climbing. Iowa land was up 8% on July 1 from a year earlier, according to the Federal Reserve Bank of Chicago.

Another long-term factor is the biofuels industry, which consumes roughly a third of the U.S. corn crop—buoying prices—and has government support behind it.
Cotton's comeback is vivid evidence of how robustly agriculture is rebounding from the recession.

Once, U.S. cotton growers' biggest customer was the U.S. textile industry. But in the 1990s, textile makers' losses to low-wage countries turned cotton into one of America's most export-dependent crops, with nearly 80% now consumed abroad.
As the domestic market shrank, thousands of cotton farmers in Mississippi and Lousiana switched to other crops such as corn and soybeans. By last year, cotton acreage in those states stood at its lowest since record-keeping began in 1866. Cotton middlemen were swallowed up in a consolidation wave.
Now, the preponderance of foreign customers is seen as a strength. From the harvest under way, the U.S. will export 15.5 million 480-pound bales, up 29% from a year before, the USDA estimates. More than a third will find its way to China's textile mills and apparel makers, which send much of it back in clothes.

Cotton prices have broken through the $1-a-pound level for the first time in 15 years. The prices and an expected bountiful harvest could swell cotton farmers' 2010 cash receipts to $5.3 billion. That would be up nearly 50% from last year and the biggest jump of any major farm commodity, according to Agriculture Department forecasts.

Half of that U.S. cotton grows in Texas, whose producers are starting to buy more fertilizer and pesticides—expenses they had been cutting before.  Brady Mimms, who began harvesting his cotton near Lubbock last week, is making plans to replace a decade-old tractor and a five-year-old cotton harvester with new models. "We're having good yields and good prices," said Mr. Mimms, who raises 4,000 acres of cotton with his sons and his father.

Economists don't expect many of the cotton farmers who had abandoned their traditional crop for others like corn to rush back into cotton and drive up the supply. That's because grain prices also are strong, and also because cotton is an expensive and labor-intensive crop to raise.
The world continues to consume cotton faster than farmers can grow it. The U.S. is the world's biggest cotton exporter, but U.S. and foreign supplies relative to consumption are getting the tightest they have been since the mid-1990s.

"It is shaping up to be the most profitable year for the cotton producer in my career," said Bud Holmes, an executive vice president of PlainsCapital Bank in Lubbock who has been lending to farmers since the late 1980s.