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2003 wasn’t all that bad: ag economist Paggi

Nov 26, 2004 9:05 AM, Automakers, By Dan Bryant

FRESNO, Calif. – Considering cash receipts were up nearly $2 billion, California’s farm economy of $32.5 billion in 2003 was significantly better than that of 2002, says Mechel S. Paggi, director of the Center for Agricultural Business at California State University, Fresno.

“The increase was pretty much across the board, led by improvements in dairy, feed, and some nuts and vegetables,” he told the recent 23rd Annual Agribusiness Management Conference in Fresno.

Paggi, whose resume lists posts as a senior economist with the Congressional Budget Office, the American Farm Bureau Federation, and the United Nations, said the state’s real net farm income for 2003 was practically $8 million, the second year of gains since the $4.7 million of 2001.

He said although the 2003 season could not be labeled completely “cheery,” it was not “dreary,” either.

Citing the state’s contributions to U.S. farm products other than wheat and corn, he said, “We need to take a deep breath and start to feel good about California agriculture.

If folks in the Midwest want vegetables, fruits, and nuts to go with their bread, they’d better consider California agriculture.”

Export markets link

Also key to the U.S. farm economy, he added, is California’s critical link with ag export markets, primarily Canada, Europe, and Japan and valued at $8.2 billion in 2003. “Cotton, almonds, pistachios, rice are important to export channels and create an understanding for what global markets mean.”

Exports, he added, are on a positive track toward future gains and reflect the aggressive marketing of California products.

For the most part, he credited the improvements to California producers’ reliance on self-help efforts such as dairy cooperatives working together, acreage reductions, self-finance promotion, and “savvy” marketing and risk management.

Nevertheless, he added, domestic regulatory initiatives are pressuring profitability, as is continuing competition from imports of many fresh and processed commodities.

Framing his view that 2003 was generally an improvement in most instances, Paggi said prices of 10 of 16 California farm products that year were greater than prices of 1998. Leading examples are almonds at 135 percent, rice at 124 percent, and broccoli at 113 percent.

“That may not tell the whole story, but by and large, everyone would agree that when it comes to price, higher is better than lower.”

However, he conceded, garlic and olives suffered price declines, and while cotton prices rose sharply, the outlook for cotton is uncertain.

SJV land prices

Paggi noted that land values in the San Joaquin Valley are tightly bound to the productivity of the land, and as commodity prices fluctuate, so do property prices. At the same time, urban infringement also is raising farmland values.

In assessing conditions of selected commodities for the 2004 season, Paggi gave a positive, “thumb up” designation to nuts, grape crops, citrus, cattle, and cut flowers. However, his outlooks for alfalfa hay, feed grains, processed tomatoes, tree fruit, dairy, and cotton rated question marks. Factors influencing those uncertain outlooks include weather, domestic production and inventories, consumer demand, and foreign production.

Turning to globalization, Paggi said many U.S. producers benefit from agricultural trade, and success hinges on “high quality, competitive prices, and a good delivery system.”

But politics must be considered and terms of trade are increasingly influenced by national policy. The shape of that policy is quite different in the aftermath of 9/11.

U.S. trade strategy, according to Paggi, is three-pronged: multilateral trade negotiations, regional trade agreements, and bilateral trade agreements. “So we are working at multiple levels to increase our access to markets.”

Regional pacts

Since multilateral agreements have become quite slow and may not be in place until 2007 or later, U.S. policy has turned to regional agreements. “Regional agreements enable us in the meantime to open new markets, create economies of scale for our exporters, and overall increase our business efficiency.”

Also new in the global picture are strategic considerations that are emerging when U.S. officials negotiate with potential foreign trade partners.

Methods to stem illegal immigration are aimed at keeping workers in their own countries. Trade agreements are based on efforts to secure strategic supplies of oil, natural gas, and fertilizer.

“The thing that is really new is using trade to create a buffer against terrorism,” Paggi said. When nations that are integrated in trade and have dependency on one another, the U.S. has fewer concerns associated with civil unrest within those countries. He said guidelines developed by Thomas Brown or the U.S. Naval War College have brought trading partners closer in the past two years.

Another presenter, John B. Penson Jr., an ag economist from Texas A&M University, analyzed the broader future of American agriculture against the highly uncertain backdrop of the 2005 season ahead.

Change inevitable

He warned producers that change is inevitable and to survive amid thin profit margins, they must know intimately their costs of production and rely on financial statements as guides.

“Times have changed, and the successful farmer will know his costs of production,” he said. Working with their co-ops and accountants, producers can learn the break-even levels of commodity prices.

Risk management, he said, requires “windshield” stress testing to look to the future. “When driving down the road you look forward through the windshield, not just through the rear-view mirror.”

He suggested using financial planning to do the stress testing with evaluation of potential risks and returns of various scenarios that may be encountered.

“And use Internet-based tools to develop pro forma plans to help analyze investment and financing decisions for several years ahead.”

Penson predicted “higher interest rates are on the way,” bringing higher costs for other inputs to production, including land values.

Farm programs will have to weather stiff competition from other federal programs, including Medicare and homeland security, for funding.

The unemployment rate will fall, impacting the availability of non-farm employment for farm operator families, many of whom have members working off the farm. In most years, their off-farm income is greater than their net on-farm income.

Demand impact

He also expects to see a rising GDP impacting demand for food and other consumer good and a rising value of the U.S. dollar impacting demand for U.S. farm products abroad.

Also defying any firm planning or preparation are China’s growing penetration of U.S. markets, the presence of Brazil and other competitors in our markets, and rulings by the World Trade Organization.

Concern with terrorism will remain, with both direct and indirect effects. The radical changes in consumer preferences over the past 15 years are apt to continue. Penson also posed the question of whether corn will become an alternative source for fuel if petroleum oil remains in the range of $40 to $50 a barrel.

e-mail: flaws@primediabusiness.com

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