ANNUAL OUTLOOK CONFERENCE

Because of significant changes contained in the Farm Security and Rural Investment Act of 2002 (Farm Bill), agricultural producers need to take a very close look at the legislation to see how it may affect their individual operations, Purdue University agricultural economist Dr. Mike Boehlje told Farm Credit Services financial professionals from across the state attending the recent annual outlook conference sponsored by the state’s two Farm Credit Services associations, 1st Farm Credit Services and the Farm Credit Services of Illinois.

In addition, Dr. Ed Seifried, economist from Lafayette College in Easton, Pennsylvania, provided an overview of the impact of the 9/11 attack and the March 2001 recession on the U.S. economy, and the economy’s current tenuous recovery.

The annual conference is held to keep FCS financial professionals, crop insurance specialists, credit and appraisal professionals and management members up-to-date on agricultural, finance and economic trends so that they can better serve clients.

Boehlje said the new six-year Farm Bill provides a continuation of support payments partially decoupled from actual production; re-institutes target prices by the addition of counter-cyclical payments similar to emergency assistance in 1999-2001; adds soybeans and other oilseeds as program crops; and continues the marketing loan program, including loan deficiency payments (LDPs).

The bill also results in higher than market effective prices which will encourage production when economic analysis might suggest otherwise; truncates effective prices at levels approximating $2.35-$2.50 corn, $5.55-$5.70 soybeans and $3.60-$3.70 wheat; expands current conservation programs (Conservation Reserve Program and Environmental Quality Incentives Program); and adds payments for additional conservation practices (Conservation Security Program).

Price floor

One of the major effects of the new bill, according to Boehlje, is to establish a floor for commodity prices. The trade off, he continues, is that markets must increase significantly for producers to benefit from price increases.

While the addition of soybeans as a program crop will provide some financial stability to producers, Boehlje stated that it will significantly decrease producers’ flexibility to experiment with and grow alternative, specialty and value-added crops.

Boehlje also predicted the bill could result in an increase in cash rents and farmland values.

Boehlje summarized with a number of questions producers need to be asking themselves:

• Should I participate in CSP, and at what level?

• Should I alter cropping patterns to maintain payments (more corn, less soybeans)?

• Should I discontinue producing specialty crops to maintain corn, soybeans and wheat bases?

• Should I update acreage and yield bases?

• How much additional rent can I pay?

• Should I participate in CRP?

• Do I qualify for, and should I participate in, EQIP?

• How much can I pay for farmland?

• Should I continue to double-crop wheat and soybeans?

• When should I exercise my LDP?

• Should I buy crop insurance, and at what level?

The economic recession that began in March 2001 appears to have ended in about January of this year, according to economist Seifried. However, the recovery is weak and some more recent economic indicators point to the risk of a double-dip recession.

Seifried also told that the 9/11 attack had a far-reaching impact on the U.S. economy. Retail sales dropped and travel and vacation spending decreased dramatically, throwing the airline industry into turmoil.

Wealth in the stock market took a 25 percent hit. Seifried believes one of the reasons that the stock market remains in the doldrums is that another attack has already been partially factored into the market at about one-half the 25 percent loss experienced as a result of the 9/11 attack.

While Fed action on 9/11 to provide liquidity in the commercial banking system prevented a financial meltdown, Seifried concluded, today’s low interest rates significantly curtail the Fed’s ability to further stimulate the economy. He believes the Fed may forego any further interest rate cuts to hold ammunition in reserve in case of another crisis.

Barring another devastating attack, prolonging the Enron-Worldcom-Tyco scandals (or uncovering new ones) or the economy entering a double-dip recession, Seifried says the market is poised for a slow but steady recovery.

He said there are a number of fundamental forces in place to drive the equity market, including the largest number of students in grades 7-12 in U.S. history – which equates into future buying demand. American productivity and economies of scale, a foreign direct investment boom in the U.S. and the propensity of Baby Boomers to consume also bode well for the economy and the stock market, Seifried summarized.