USA - Cotton farmers headed for a hard landing as subsidies phase out
Growing cotton didn't used to be a stressful pursuit for Dan Smith, a lifelong farmer who now plants some 5,800 acres near the North Texas town of Lockney.
Equipment could always break and prices could drop. Drought could hit - often did - and insects could eat away at the crops. But for years, if that happened, he had a safety net: The government would step in with either direct payments or subsidized insurance programs to keep him in the black.
"I have lost everything that I had in a year because of bad weather," Smith says. "But it was always something you could get out of. You just have a good crop the next year and get back on your feet."
This year, that won't happen, as Congress' 2014 agricultural subsidy reforms come into full effect. The five-year farm bill retained the insurance subsidies, but ended direct payments, leaving farmers exposed to volatile conditions after transition assistance runs out.
With commodity prices at historic lows, cotton producers in Texas - who account for about half of the U.S.' $28.4 billion industry - could be headed for a hard landing.
"There are whole towns and communities that are totally dependent on cotton," says Gene Hall, spokesman for the Texas Farm Bureau. "We're worried that we're looking at a train wreck here."
A historic shift
Most economists have long hated farm subsidies. Governments support farmers for multiple reasons: To help them compete against foreign imports, to preserve pastoral landscapes, and to maintain a domestic food supply. But research has found that they also distort production decisions, can suppress the agricultural economies of developing countries, and inflate land prices - all at the expense of the taxpayer.
"This isn't transferring food stamps to people who are hungry," says Dan Sumner, director of the Agricultural Issues Center at the University of California-Davis. "These are relatively wealthy families, the typical small business in America. And the subsidies propped up and kept that business going probably where it didn't belong."
But year after year, powerful farm-state interests kept them in place, arguing that it was only fair that the U.S. support its farmers when other big producer countries do the same for theirs.
When it comes to subsidies in the cotton industry, nobody benefited more than Texas.
Across the state, farmers took in $12.1 billion in agricultural subsidies between 1995 and 2014, or 33.7 percent of the total, according to calculations by the Environmental Working Group, a Washington D.C.-based advocacy nonprofit. Then there's another $11.3 billion in crop insurance assistance on top of that.
During that time, cotton production surged in the U.S., partly due to advances in farm technology, growth in global demand and the fact that subsidies made the crop essentially risk-free.
Smith got a total of $3,919,435 between 1995 and 2014 - an average of about $196,000 per year, with more in the bad years and less in good ones. He knows it looks like a handout, but says the money has kept the farm afloat.
"A lot of this money has gone to buy tractors, farm equipment," he says. "I just worry the general public will think I went and bought a Cadillac."
Smith says the program is necessary to keep cotton farms competitive when other countries, like China and Brazil, still subsidize their farmers.
"People can say, 'I don't like subsidies.' But do you want to keep the cotton industry in the United States?" Smith asks. "I don't like taking subsidies, but I've had to stay in business."
This season begins an experiment in what happens when most of the support systems that had propped up an industry for decades are yanked away.
Well, not entirely yanked away.
The 2014 farm bill ended the practice of handing out direct payments based on acreage, but it didn't go as far as many reformers wanted. It maintained some crop insurance guarantees that turned out to be just as expensive as the old system.
But cotton lost access to those more generous insurance programs to lay to rest a long-running legal case that Brazil had brought against the U.S. at the World Trade Organization, alleging that America's subsidies were illegal under free trade agreements. In the end, the Obama administration persuaded its southern neighbor to drop the charges in exchange for $300 million dollars in aid for Brazilian farmers and a scaled-back insurance program for U.S. cotton farmers that would only cover deep losses rather than the price-based payouts that other crops enjoy.
U.S. cotton producers accepted the deal, thinking that prices then hovering between 90 and 100 cents per pound - higher than the historical average, but far lower than they had been during a commodity price bubble in 2011 - would keep them out of trouble.
"The reason that was done like it was, was in order to solve the Brazil case," says Jody Campiche, vice president for economics and policy analysis at the National Cotton Council. "It ended up that if cotton did not comply, it was going to affect a whole lot more than cotton. Cotton was the one that was thrown under the bus."
The bottom falls out
But even as the deal was headed towards passage, the price of cotton began to decline to around 65 cents as a bubble in commodity demand fully deflated.
Much the same as oil and gas producers, cotton farmers are now in the position of trying to maintain enough infrastructure to rebuild when the price comes back up - if it does. Although demand has outstripped supply after a long period of global surplus, the price remains a good dime per pound below what farmers would need to break even.
Already, there are signs of distress among farmers weakened by the drought of a couple years ago. The federal Farm Service Agency reports that in April, applications for emergency loans were up over 185 percent over the previous year. Applications for all loans - which farmers often apply for if they can't qualify for private financing - are up 21 percent. Mediation, which happens when a farmer has trouble staying current and might need to work out a payment plan, is up 75 percent.
As a result, the government body is burning through its available cash ahead of schedule and may run out before the season's over. If Congress doesn't refill the FSA's coffers, farmers could be out of luck.
For another metric, the Food and Agriculture Policy Center at Texas A&M has been taking the pulse of farm health for decades, and this spring found farmers are in a more precarious financial position than they've seen since the 1990s. Commercial lenders are starting to decline applications for operating loans, and advising their former clients to retire while they have something left.
"Insurance works really good against protecting against crop failures and price drops within a year, but it doesn't do any good for a sustained price drop," says Joe Outlaw, the Center's co-director, estimating that the price of cotton would need to rise to about 75 cents for farmers to break even. "The cotton industry has no safety net right now. This is a make-or-break year for the industry."
Trying to hang on
Some cotton farmers may try to switch to other crops that still have more generous subsidy programs or better prices. But many don't have the soil conditions or weather to grow rice or corn. And once one stops paying the note on a cotton harvester, if the bank takes it away, it can be hard to get one back.
"We're digging into equity to pay the bills," Smith says. "You can't just shut the farm down for two to three years, wait this out, and then just start it back up."
Earlier this spring, the cotton lobby and its allies on Capitol Hill tried to get part of the crop reclassified as an oilseed, which would qualify it for more assistance. The U.S. Department of Agriculture rejected that bid, but did just this week decide to hand out $300 million in aid to help with cotton processing expenses, which will average $36.97 per acre for Texas farmers. "The USDA continues to stand with America's cotton producers and our rural communities," said Agriculture Secretary Tom Vilsack in a press release about the announcement, which noted the economic stress that cotton farmers have been under.
That's just a one-time fix. In the longer term, some farmers favor trying to amend the farm bill to put subsidies back in before the whole thing comes up for renewal in 2018. But Smith - and the Texas Farm Bureau, with which he is very active - worries that could do more harm than good.
Not everyone is buying the cotton industry's distress calls. The Environmental Working Group, a longtime critic of farm subsidies, argues that the debt-to-asset ratio of the entire farm sector is still below that of the population overall. Farmers aren't doing that badly financially, mostly because of off-farm income, and haven't started defaulting on loans en masse.
"It's hard to feel sorry for farmers who have the most generous crop insurance subsidies on the planet and who enjoyed a period of above-average prices that contributed to significant equity in their operations," said Scott Faber, EWG's vice president of government affairs. "Farmers aren't going to lose their shirts when prices return to normal if they are good stewards."
Eventually, EWG thinks that production and land costs will adjust to a world in which unsubsidized farmers can't pay inflated rates, helping them to stay afloat.
Even if the cotton industry did disappear, it's unclear how much of an economic impact that would have. Farms are so automated and so productive now that they don't employ many people. Smith, for instance, only has three helpers on his payroll. The U.S. Department of Agriculture estimates that 200,000 people work in the entire U.S. cotton production chain, from farm to gin to mill; the majority of the crop is exported, since textile manufacturing began drifting overseas long ago.
But about 50,000 of those jobs are in Texas, concentrated around the town where Dan Smith lives. And if nothing changes, it could mean that many people will have to find livelihoods off the land. "I've spent my adult life buying land. And I always thought when I retire, I'll rent that land out to a younger farmer. But if there are no younger farmers ... Used to be, the more land you have, the more you make. Now, it could be the more you farm, the more you lose."
Source - http://www.houstonchronicle.com/
