Agriculture is a Growth Industry

| FROM THE PRINT EDITION |
 
 

Dan Newhouse is a farmer, and thus possesses the farmer’s long-cultivated cautious attitude about assuming that good times in agriculture are permanent or that there’s no storm cloud—a literal or figurative one—just over the horizon.

He has personal experience to back him up. Newhouse has been involved in farming since the late 1970s, and his family has been farming in the Yakima Valley since 1918. Speaking as just one of the looming thunderheads that farmers worry about, Newhouse says, “The one constant in farm prices is change. When prices are up, everything looks good and memories are short.”

Newhouse is also director of the Washington State Department of Agriculture, appointed to that post in 2009, so it is his official duty to worry about the status and future of the Washington farmer.

Newhouse might be reasonably excused for not getting too enthusiastic about the current boom cycle in agriculture, one that has had some giddy observers predicting the end of the need for crop-price-support programs. But even he will allow that, while other industries such as construction or financial services continue to struggle, “Agriculture is a bright spot in Washington state’s economy currently, and has been throughout this recession.”

Indeed. Washington’s agricultural output reached a value of $8.25 billion in 2010, the second highest on record (trailing only 2007’s $8.35 billion), and a 13 percent improvement over 2009. While the numbers on 2011 are still being compiled, the reports from the fields and orchards of Washington are “very positive,” says Phil DiPofi, president and CEO of Northwest Credit Services, a Spokane-based farm lender. “Ag in general has been very strong for the last seven or eight years at the macro level,” DiPofi says. “By and large, agricultural producers are doing well.”

Of course, this wouldn’t be a farm story without some cautionary notes. “There’s a little uncertainty circling around issues like labor, the farm bill, crop insurance, the value of the dollar,” DiPofi admits, “[but] 2011, as it closes out, has been a good year.”

Agriculture, he suggests, is “a real success story as part of the Northwest economy [and] it continues to be a strong economic driver.”

And aside from the ever unpredictable matter of weather, conditions seem to be lined up for a pleasant 2012, which will be welcome news for those gathering at events like this month’s Spokane Ag Expo (February 7–9), in the hundreds of communities that rely on equipment dealers, produce packing and processing houses, and at all the businesses and services that support farming or rely upon its output.

That the farming industry has done well during the recession is also why you shouldn’t expect any radical changes to the industry coming out of the downturn. The industry has a pretty good financial and marketing base from which to work and build upon. Why mess with a formula that managed to cope with an economic calamity that pummeled other sectors?

While farming may be invisible to city dwellers and suburbanites, it’s a hugely visible presence in the state economy. Agriculture directly accounts for 85,000 Washington jobs—not far from the 89,000 jobs in the aerospace sector. Food processing adds 37,000 more jobs—and an additional $13 billion in annual economic activity. Visible or not, the ag industry, Newhouse says, is “important in virtually every community and county in the state.”

So exactly how did the agriculture sector make it through the recession in such good shape?

The explanation goes beyond that old standby: “People still gotta eat.”

It starts with a diversity of production. While Washington is a nationally significant producer of commodities like apples (number 1 in the United States), potatoes (number 2) and wheat (number 4), it’s not wholly reliant on a small sampling of crops (see chart, page 32). Apples were the top-ranking commodity by value of production in Washington in 2010, but just 18 percent of the state’s total output.

Washington is also the nation’s leading producer of red raspberries, hops, spearmint oil, wrinkled seed peas and pears, all nice crops to have but hardly at the level of commodities, on the national level at least, of corn or soybeans. Newhouse says the state produces nearly 300 different commodities. “We’re a specialty-crop state; you can’t liken us to the Iowas and Kansases,” he says.

Diversity matters, as Newhouse can attest from direct experience on his family’s 600-acre farm near Sunnyside, where he grows tree fruit, grapes, alfalfa and hops. “Fruits are doing OK,” he says, “[and] wine grapes have been one of the bright spots.” Field crops such as hay are seeing good prices, but he adds, “I’m also a hop grower. Currently that segment of the industry is struggling with an oversupply issue and prices are struggling right along with them.”

Another, and much more significant, exception to the generally good news for Washington farming can be found in milk, by value the state’s second-biggest commodity. “Just a year ago, dairy prices were below cost of production, dairy farmers were losing millions of dollars in equity,” Newhouse says. “We lost a lot of dairy farmers in the state of Washington. Things looked pretty dire nationwide, not just here.”

Conditions are improving, with higher prices allowing those dairy farmers still in the business to pay down accumulated debt. But the fact that Washington isn’t relying on dairy to carry the agriculture industry means it can turn in solid overall performance numbers even when an important sector is ailing.

Another major contributor to the sector’s success is exporting. The state of Washington doesn’t need $8 billion worth of food production to feed itself, but the rest of the world does. Thirty percent of Washington’s agricultural output is exported, and for some specific crops it’s as high as 75 percent, Newhouse says. Export growth has been made possible, DiPofi adds, by “the ability of the U.S. farmer to create a lot of surplus production in commodities with a real strong reputation for quality and food safety”— not to mention a weaker U.S. dollar and Washington’s proximity and port access to Asia, whose larger and wealthier populations are willing to pay for the kind of food this state grows.

Playing in international markets hasn’t always been a good thing. A decade ago, people were wondering whether Washington’s apple industry had a future; the oft-repeated anecdote was that China planted as many apple trees every year as Washington had in all its orchards. Desmond O’Rourke, founder and chief executive of Belrose Inc., a Pullman publisher of analysis on the world apple market, says as China took away Washington’s markets in Southeast Asia, some smaller producers and packers closed up and orchards were taken out of production; apple acreage fell from a peak of 210,000 acres to 160,000.

Rather than give up, the state’s apple industry created new varieties, restructured itself and got more aggressive about export marketing. China’s own growing population and increased per-capita consumption of apples also helped absorb some of the glut. “It’s quite a reversal of fortune,” DiPofi says.

Add to the drivers of ag prices such factors as the food-vs.-fuel debate, in which increased use of corn for ethanol has pushed up prices for that commodity as well as wheat, and you’ve got the makings of good economics to go with good growing conditions for Washington’s farmers.

Still, Newhouse warns, “Farmers are not recession proof.” All farmers, not just those competing in markets with surpluses and depressed prices, are facing higher costs for fuel, labor, water and fertilizer, with price increases that in some cases outpace the rise in commodity prices, thus squeezing margins. “There continues to be a tremendous amount of pressure on the bottom line for individual producers,” he says.

The issue of labor availability and the outcome of the debate over immigration policy are also long-term concerns for farming. Last year, the worker shortage was so acute that Governor Chris Gregoire authorized the use of prison-inmate labor to get the apple harvest in.

Water is always an issue in the eastern part of the state. So is the form of the next federal farm bill and the fate of price support and crop insurance programs. And there is always the concern that higher prices are just a point in a cycle, not a permanent condition.

“The worldwide shortage of wheat in the 2008/2009 crop year initially spiked prices,” says Scott Yates, communications director for the Washington Grain Commission. Russia’s ban on exports in the 2010/2011 marketing year did so again.

“But those ‘shocks’ are past and we are now in a situation where there is an abundance of wheat on the world market and prices are falling,” Yates says. “Things are not as bad as they could be because corn supply is precarious and corn helps hold wheat prices up, since when corn gets too high, wheat is used to feed livestock.”

O’Rourke says fears of food shortages, driven by crop failures and severe weather in various parts of the world, have subsided for the moment. For commodities like wheat, prices are “now down to a more normal demand-supply situation.”

Yates says farmers have been through enough high-price cycles before to be “a little more conservative this time.” He adds: “Although equipment sales are up and you see ‘new paint’ in the field, I think a lot of folks banked what money they made recently to ride out any potential downturn.”

That conservative mode of operation, and the resulting healthy shape of agriculture, are among the reasons the industry emerges from the recession without a pressing need for massive change and without having radical restructuring thrust upon it. That’s good, because farming is not an industry you can change dramatically, and farmers aren’t prone to radical change anyway.

But it doesn’t mean no change for farming. Some will be driven by external factors and issues. The balance will be prompted by opportunities Washington farmers believe they see to sustain their recent successes.

“Some segments will get more integrated and larger,” DiPofi says. “They’re very capital intensive. Equipment is expensive. Land is expensive.” Apple operations are “vertically integrating” so that individual companies will handle their own production, storage, processing and marketing. Consolidation and integration, O’Rourke notes, is what allowed Washington growers and processors to adjust to the flood of Chinese apples.

“We’ll see the large getting larger,” DiPofi says, “but that’s been a longstanding trend for decades.”

The key to Washington ag’s future will be how well the industry handles two seemingly divergent trends and markets: going abroad and staying home. With even more emphasis being placed at the national and state level to boost American exports, Washington farmers will be pushed to increase the amount they send abroad and the markets they export to. With Asian markets growing faster than the U.S. markets, the state’s agriculture sector is “hitching our wagon to their economies,” Newhouse says.

At the same time, the interest in locally sourced food, whether it’s purchased at a farmers’ market, in a restaurant or at a grocery store, is creating new opportunities. “There is a market for it,” DiPofi says. “There is a growing segment of the population that is tuned in to sourcing.”

Newhouse says farmers’ markets may represent only 5 percent of the state’s total ag sales, but they provide a much bigger service for the industry. “They are the face of agriculture in our state,” he says. “They’re the ones interacting with the consumer. The larger farmer doesn’t get that opportunity.” Farms producing for direct sales at local markets “may be small in production numbers but their importance is huge in terms of telling the story.”

The story, as he sees it, will be making sure Washington farmers can continue to produce successfully. Newhouse believes there’s an audience for the message. Whether it’s someone buying a basket of Rainier cherries at a farmers’ market in Seattle or an Asian importer buying Washington produce by the container load, Newhouse takes comfort in knowing this: “They like to have their Washington-grown products.”

IN 2007, THE ‘AVERAGE’ WASHINGTON FARMER …
… was a 57-year-old family-farm operator with a farm spanning 381 acres worth $759,146.

… had farm machinery and motor vehicles worth $83,468.

… sold crops valued at $121,115.

… sold livestock, poultry and products valued at $51,878.

*Source: U.S. Department of Agriculture