April 18, 2000

Special Report:

Farm financial crisis hits Iowa
as net income steadily drops

Nick Hillyard
digital iowa staff reporter
Drake University

DES MOINES, Iowa-- Even before Iowa was a state, it was associated with agriculture, and now it is one of the nation's top producers. But tough times have plowed through the heartland, making it hard to produce a profit.

The U.S. Department of Agriculture reports that Iowa produces more corn, soybeans and pork than any other state. More than 90 percent of Iowa's land area is used for agriculture, the most in the nation.

Since 1996, Iowa's net farm income has steadily dropped. In 1996 the net income was $4 billion. In 1999 it is projected to be a little more than half of that, $2.5 billion.

Along with a drop in profit, Iowa has also seen the number of farms decline for decades. In 1987 there were 105,180 farms. The most recent Agriculture Census for Iowa found that in 1997 there were 90,792, a 14 percent drop in 10 years.

"The big guys with deeper pockets are expanding while the little guy can't afford the losses," said Pete Theodore, communications director at the Iowa Pork Producers Association. "A lot of the family farms are disappearing."

Hard times have left many remembering the not-so-distant farm crisis of the 1980s. Between 1978 and 1987, the Iowa Department of Economic Development reports, 16,000 farms went out of business.

"Low prices in agriculture are due to an imbalance between supply and demand," said David Miller, director of commodity activity at the Iowa Farm Bureau Federation.

The high sale prices of 1996 ($4 to $5 per bushel for corn and $9 to $10 per bushel for beans) caused large production increases around the world, and this was exacerbated by four years of good growing weather worldwide, Miller said.

Decreasing demand for corn and soybeans was the result of a strong dollar to weak foreign currencies and the decline of the Asian economy, Miller said. Asia is the largest buyer of U.S. grains.

"We've been dealing with a large inventory, but very low demand," said Tim Cupka, director of production technology at the Iowa Soybean Association. "Supply has briefly surpassed demand, mostly because of international recessions."

Neither Asia nor Russia has the money to purchase as much as it did in the past, Cupka said."South American production has dramatically increased. It used to be that the world was ruled by U.S. soybean production, now we have some competition," he said.

"There is increasing demand, but still overproduction. Now the market will correct itself," Cupka said.

Ray Hansen, director of grower services at the Iowa Corn Growers Association, said, "We are trying to find additional ways to raise yields and cut costs. Prices are coming out of all-time lows."

Using science to raise yields, renovating the lock-and-dam system on the Mississippi River for easier transportation, reducing trade barriers and finding new markets are some of the ways Hansen said profits would increase.

"Anything we can find that consumes corn will boost prices," Hansen said.

The National Corn Growers Association lists fuel, fuel additives, plastics, motor oil and hydraulic fluids as some new corn markets.

"We are beginning to see exports and prices come back up after lows six months ago," Miller said. "We're working hard to increase exports; market access is an issue very important to agriculture."

Not only are markets needed to increase demand but also to handle rising yields and productivity worldwide, Miller said. "Growth markets are outside our borders, it's India, it's China," he said.

Cupka said,"We're most excited about China, it's really starting to open up its markets."

Due to a World Trade Organization accession agreement, China has opened up its market to soybeans and corn. Tariffs will be bound to 3 percent on soybeans, 5 percent on soybean meal and 9 percent on soybean oil - all considerably lower. Under the same agreement, China has committed to end export subsidies on its own corn, which will reduce its price competitiveness in other markets, said a statement from the U.S. Department of Agriculture.

Another potential market for soybeans is protein-deficient countries such as Cuba, Cupka said. The soybean association is trying to get the United States to allow trade with Cuba.

Iowa producers may not have as much to trade after this summer. Climatologists are predicting poor weather for the year 2000 growing season. Cupka said this will reduce yields and supply, driving up demand and prices."This isn't going to be a revolutionary jump, but prices will rise. A lot of farmers are still holding on to last year's crop," he said.

The Iowa Department of Economic Development reports that half of Iowa's corn crop is fed to livestock. The cost of grain is the largest influence on production costs for pigs, said Marty Schwager, producer educator at the Iowa Pork Producers Association.

It roughly costs 35 cents per pound to raise pigs, Schwager said. In 1994 prices dropped to 28 cents per pound.

"That was one of the first times we saw prices fall that low. Fortunately, it didn't last long," Schwager said. "A whole group of producers jumped out and didn't get back in."

There was a four-year cycle where a certain group of producers jumped in when prices were good and out when prices were bad, Schwager said. After, 1994 this group didn't jump back in, leaving the farmers that have more money invested in their operations.

"From 1995 to 1997, prices were very good so producers expanded rapidly," Schwager said. This expansion led to the next down cycle in December 1998. Prices fell as low as 10 cents per pound, 25 cents below the price of production. Producers lost as much as $60 per pig upon sale. The previous in-and-out producers weren't there to jump out.

"After many months the more committed producers lost enough equity that some decided it was time to exit the business," Schwager said. "It's taken a significant amount of time to get through that period."

"We'll see some profitable prices this year," Schwager said. He attributed some of this outlook to an increase in pork exports over the last decade.

In 1986, the United States exported 39,000 metric tons of pork. In 1996, the amount exported rose to 305,000 and has continued to increase. "Several years ago, for the first time in history, we became a net pork exporter," Schwager said, exporting more pork than we import.

Although exporting more is a step in the right direction, Schwager warned that this can be risky. "Exports are healthy until there is a glitch in the marketplace," he said.

Denmark, a country that produces close to the same amount of pork as Iowa, exports 80 percent of its pork, Schwager said. That leaves a lot of control over the industry in the hands of other economies that Denmark has no control over. This has caused that nation problems in the past.

A March 22 release from the U.S. Department of Agriculture said that China recently issued new rules governing the importation of U.S. pork that should dramatically increase American pork exports. China consumes far more pork than any other country and tariffs on U.S. pork imports have been reduced from 20 percent to 12 percent.

In 1999, U.S. pork exports were up 9.2 percent to Japan and 15.1 percent to Mexico but down 95.4 percent to Russia, said John Lawrence, livestock economist at Iowa State University. Lawrence predicted that hog prices are entering a profitable period, but it will take a while for producers to recover from the losses acquired over the last 28 months.

There will be the same cycle of highs and lows in the market, just different variables, Schwager said. Other variables include fewer pigs bought and sold on the open market because of producer-packer alliances and meat packers being able to process more -more- or fewer pigs, depending on the market.

Iowa State University Extension research done by Robert Jolly shows almost half of Iowa’s farms are financially vulnerable. Farms were divided into four categories: strong, stable, weak and severely stressed.

Only 10.2 percent of Iowa's farms were classified as financially strong operations. These farms have the lowest amount of debt, 6.1 percent, and were more concentrated in grain production.

Iowa farms with stable operations totaled 40.8 percent. This group carries 28.6 percent debt with most operations in grain or grain-livestock.

Weak farms made up 28.3 percent and owe 28.1 percent. This group has a negative projected income and is more concentrated in livestock.

The final group, severely stressed operations, totals 20.7 percent of Iowa farms. It has 37.2 percent debt and is dependent on livestock, mostly hogs.

Throughout the industry, analysts are hopeful - whether it is because of new uses, new markets or additional exports. Profits are expected for the future.

This is a good sign for an industry that goes hand-in-hand with Iowa. One thing is clear: Family farms are declining, and without profits in the near future, many will disappear. For Iowa agriculture's sake, hopefully Iowa's No.1 status in corn, soybeans and pork will remain an asset.