WASHINGTON -- U.S. farmers are expected to harvest bumper crops of corn, soybeans and wheat this year, which should depress prices and squeeze farmers' income, while helping keep inflation in check.
``One person's low prices are another person's low costs,'' said Gary Thayer, an economist at A.G. Edwards and Sons in St. Louis. ``It's definitely a negative for the farm sector, but a benefit to the economy as a whole.''
This year's soybean crop will set a record, while the corn crop should be the second largest ever, the U.S. Department of Agriculture said in its most complete assessment of this year's crops. Although farmers planted a decade-low amount of wheat, near-perfect weather throughout the growing period pushed yields to a record 43 bushels an acre.
At a time of bountiful harvests, worldwide demand has fallen. Asian nations, which imported $23.8 billion worth of U.S. farm goods last year, could reduce their purchases 15 percent this year, USDA said in its most recent forecast, issued in May.
With supplies abundant, corn prices are down 15 percent from a year ago, while soybean prices are down 16 percent. That's eroding farm income. The USDA estimated in July net farm income will drop to $42.5 billion, down 15 percent from a year ago and far below the record $53.5 billion in 1996.
Asia's financial instability ``is significantly affecting the American economy,'' Treasury Secretary Robert Rubin said in an interview on ABC's ``Good Morning America.'' ``Something like 40 percent of American agricultural production is exported, and about 40 percent of those exports go to Asia,'' Rubin said.
Agriculture's impact on the economy is substantial. Farming alone accounts for only a little more than 1 percent of the nation's gross domestic product, but the entire food chain --farmers, suppliers, processors and distributors -- produces about 13 percent of GDP.
And falling grain prices will help consumers. Food prices are expected to rise 1.8 percent to 2 percent this year, according to USDA projections. That's down from a 2.6 percent increase in 1997.
Lower commodity prices also are helping keep U.S. inflation in check. Over the past 12 months, consumer prices have risen just 1.7 percent.
Low inflation, in turn, has kept Federal Reserve policymakers from raising interest rates and restrained bondholders from demanding higher yields to protect their investments. Lower interest rates fuel U.S. economic growth by making homes, cars and business expansion more affordable.
Falling grain prices are reducing costs of raw materials for big users such as Tyson Foods Inc. and Archer Daniels Midland Co. The spot price of corn has fallen to $2.0975 a bushel, the lowest in more than five years.
``I love it -- it's going to be pretty good for us and the whole corn users industry,'' said Al Di Dominicis, who buys more than 100 million bushels of corn each year for Corn Products International Inc., the fourth largest commercial corn user, which makes corn oil used in many food products.
Sinking grain prices also are helping the livestock industry. Ranchers, hit hard by the Texas drought, have been forced to send more cattle directly to market, raising supply and pushing beef prices lower.
``A big corn crop, which forces down the price of grain for cattle, isn't all bad, because it's helping us stay alive'' by trimming feeding costs, said Chandler Keys, vice president of public policy at the National Cattlemen's Beef Association.
Not all the farm news is good for consumers, though. The drought in Texas and wet, cool weather in California probably will shrink this year's cotton crop, pushing up prices.
U.S. textile mills will look to foreign growers to meet their needs, said David C. Brandon Jr., a senior vice president and cotton specialist at Salomon Smith Barney in Memphis, Tenn.
That could widen the trade deficit, though the effects could be muted since cotton is just 5 percent of textile prices, according to Kevin Brinkley, an economist at the National Cotton Council in Memphis.
Still, food costs should be stable. Processed food prices fell 0.4 percent in June's producer price index. ``We have a very strong dollar keeping commodity prices low. There's no sign of that being a temporary factor,'' said A.G. Edward's Thayer.
No one in the farm belt is celebrating that outlook. The $42.5 billion in farm income projected for this year is below the 10-year average of $45 billion, the USDA said.
``This is a stress period for the farm sector,'' said J.B. Penn, senior vice president at Sparks Cos., McLean, Virginia.
But farmers' problems are far short of the crisis that gripped agriculture in the early 1980s, when exports collapsed, land values sank and interest rates soared. ``I don't think it's an economic crisis,'' said Penn.
``We're concerned about the low commodity prices, and we're watching them carefully,'' said Mike Singer, an economist at the Chicago Fed. ``We've got a decline in exports, but there's no collapse. Some people are hurting pretty badly, but overall the sector's in pretty good shape.''
That could change if exports don't pick up. Japan is the largest buyer of U.S. corn and soybeans. The yen is near an eight-year low against the dollar, making U.S. products more expensive. Exports won't rebound soon, adding to U.S. supplies.
``I'm pretty pessimistic about the time it takes for Asia to return to the export market -- I'm thinking one to two years,'' said Malinda Goldsmith, a broker at Fundamental Futures Inc., Dallas.
That would slow the economy.
If farmers worldwide again harvest bumper crops in 1999, and prices fall further, ``then we'd be at the front edge of a real recession,'' said Mark McMinimy, an analyst at the Washington Research Group, a unit of Schwab Capital Markets.