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FAPRI report: Farm income drops; recovery ahead

Net income for the nation's farmers will drop sharply this year before recovering in 2003, according to an economic analysis of U.S. agricultural markets under the new farm bill by the Food and Agricultural Policy Research Institute (FAPRI).

In an updated analysis presented to Congress, FAPRI economists project a $7-billion decline in net farm income for 2002. The drop is driven primarily by recent downturns in prices for cattle, hogs, poultry and milk.

FAPRI shows net farm income dropping from $47.9 billion in 2001 to $40.8 billion this year. Larger-than-anticipated supplies of meat and milk coupled with the drop in U.S. poultry exports to Russia contributed to the lower price outlook for the livestock and dairy sectors.

The analysis was based on market and crop conditions in June. “The short-term markets can change quickly,” said Scott Brown, a FAPRI program director. “When we are in a weather market, as we are now, market prices can change farm income and government cost estimates just as quickly.”

FAPRI is an agricultural policy think tank with centers at the University of Missouri, Iowa State University and Texas A&M University. The centers are funded by Congress to provide independent policy analysis for legislators. FAPRI ran dozens of “what-if” scenarios on proposals during the writing of the farm bill.

The new farm bill, the Farm Security and Rural Investment Act, will make payments to farmers in times of low prices for grains, oilseeds, cotton, and milk. Some of those government payments designed to offset low crop prices in 2002 will not be made until 2003. FAPRI estimates government payments to farmers will be lower in calendar year 2002 than a year ago.

With a projected rebound in on-farm prices, plus farm bill payments, net farm income is expected to recover to $47 billion in 2003. Total farm receipts are projected at $206.4 billion this year and $214.5 billion next year.

Consumers can expect a slower rate of increase in food prices through the 10-year baseline. The Consumer Price Index for food increased by over 3 percent in 2001, led by a 4.4 percent increase in meat prices. FAPRI projects the CPI for food average at just over 2 percent from 2002 to 2011.

Government annual spending on the six-year farm bill is projected to be nearly the same as annual spending was during the last four years. For the comparison, FAPRI added farm bill payments with the annual emergency supplemental payments in 1998 to 2001.

Government outlays will be up from previous estimates because of declining farm prices. The Commodity Credit Corporation total expenditure for the next 10 years is projected at $203.5 billion, an average of just over $20 billion per year. After 2004, government expenditures are projected to decline as farm prices recover.

Under the new farm bill, most government payments continue to be decoupled from farm production. Under the FAIR Act, the farm bill enacted in 1996, planted acreage in the nine major crops declined by more than 12 million acres from 1996 to 2001.

Crop acreage leveled off this year and FAPRI projects a small increase in 2003 in part because of the income protection provided under the new farm bill. In future years, projected planted acreage increases slightly as the effect of increasing commodity prices more than offsets the increased land set aside under the conservation reserve program.

Crop prices overall remain well below the levels of the late 1990s. Compared to recent low prices, however, grain, oilseed and cotton prices are projected to increase “modestly over time,” according to the report. Corn and wheat prices are expected to rise above loan rates as soon the 2002 marketing year, but average prices for soybeans, cotton and rice are likely to remain below government loan rates for years to come. That opens the way for loan deficiency payments.

The counter-cyclical payment program, a new safety net feature of the farm bill, will provide similar levels of payments over the next six years as supplemental spending bills provided over the past four years. The farm bill enacts a way of providing payments instead of leaving support to annual Congressional appropriations in times of low prices.

As crop prices increase, the annual counter-cyclical payments will decline from $5.2 billion at the peak in 2004 to $2.3 billion in 2011.

The complete farm bill analysis is on the FAPRI Website

Duane Dailey is an Extension and ag information senior writer for the University of Missouri.

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