December 2, 2022
Jacqueline Holland is speaking at the upcoming Farm Futures Business Summit in Coralville, Iowa January 19-20, 2023. Learn more and register here.
USDA released an updated look at 2022 Farm Financial Forecasts on Thursday, and the results have positive implications for much of the Heartland. Here are some key highlights from Thursday’s report.
Net farm income to set new highs
“Many elements of the farm financial reports are going to reach record highs this year,” USDA’s Carrie Litkowski, a senior economist and program leader in the Farm Economy Branch within the Resource and Rural Economics Division at USDA’s Economic Research Service, shared in a webinar on Thursday.
In fact, net farm income in 2022 is going to reach its highest level since the Great Grain Robbery in 1973 amid soaring commodity prices. At $160.5 billion in 2022, net farm income is forecast to be over 7% higher than 2021 levels. Net cash farm income is likely to rise even higher than last year, up 19% to $187.9 billion.
What causes the difference between net farm income and net cash income? Timing, Litkowski explains. Net farm income is used to describe the value of the crop or livestock when it was produced (i.e. the value of the 2022 corn crop, even if it has not been sold) while cash valuations measure the value of a product when it was sold (i.e. sales of the 2021 corn crop that may have occurred in 2022).
ERS uses the 2022 calendar year to measure revenues and expenses. Some depreciation as well as inventory adjustments also factors into the difference between cash and net farm income measurements.
Regardless of the accounting jargon, times are good in farm country. Much of the increase in profits is attributed to higher cash prices received at the farmgate for products sold. Rising production costs are limiting the upward expansion of farm profits, though some additional government assistance this year also helped ensure record profits.
Dairy, corn, soybean, and wheat prices are expected to provide the biggest boost to larger cash receipts this year. In fact, soybean cash receipts are slated to hit an all-time high this year while 2022 corn receipts will trail only 2012’s as the largest in history when adjusted for inflation.
The great inflation race
Inflation has dominated the headlines in 2022 and today’s report highlighted some of those impacts in farm country. In nominal (absolute) terms, the $160.5 billion in net farm income expected to be earned by U.S. farmers this year will only be the largest income on record.
But when adjusted for inflation, 2022 will only be the fourth largest net farm income in history, trailing 1973, 1946, and 1948.
And while commodity prices are historically a key indicator of inflationary pressures, as evidenced by this year’s stellar cash receipts, inflationary pressures have also taken a toll on expenses in the Heartland this year.
In nominal terms, 2022 farm production expenses are slated to increase nearly 19% from last year. After adjusting for inflation, that difference stands at 12%. Nominally speaking, 2022 farm production expenses of $442 billion are expected to encompass the largest one-year production expense increase on record for U.S. farmers.
When 2022 production expenses are inflation-adjusted, that only accounts to a 12% increase. While that is not as severe as the nominal valuation, it is still the highest inflation-adjusted price increase since 2014.
Fuel (47.4%) and fertilizer (47.0%) expenses are likely to see the largest year-over-year percentage increases in farm country in 2022. But in absolute terms, fertilizer and feed expenses will see the biggest dollar increases from a year ago. Fertilizer expenses increased $13.9 billion from 2021.
The impact to feed costs is especially important – feed expenses are the largest cost category on the farm income statement and the surging prices of corn, soybean, wheat, and other feed products over the past year ballooned that section of the financial statement substantially in 2022. While it only accounted for a 17% gain, the nominal increase totaled $11.3 billion this year for livestock and poultry feeders.
Litkowski noted that the growth in production expenses in 2022 increased faster than inflation. However, the surge in commodity prices and resulting cash receipt increases outpaced both expenses and inflation over the past year, enabling record levels of net farm income in 2022.
Not all profits created equal
While most readers in the Farm Futures viewing area are expected to see higher profits in 2022, it is not a one-size-fits-all situation. Profit forecasts overlap geographically with prominent corn, soybean, cattle, and dairy operations this year.
The type of commodity produced matters just as much as the size of the farm, Litkowski explained. Cotton and hog production in the Southeast was not as lucrative as corn and soybean production in the Heartland and Great Plains this year, so cash receipts and government payments likely took a bigger bite out of profits in the Southeast.
Many of these farm sizes are much smaller in comparison to corn and soybean operations in the Midwest and did not benefit as much from corn and soybean price increases over the past year.
Government assistance takes a back seat
Farm country was able to wean off pandemic-related government support in 2022 after two years of staggering government support in the farm sector. Additionally, commodity price insurance program payments (i.e. ARC, PLC, Dairy Margin Coverage) are expected to be minimal at most in 2022.
However, weather disasters and the Inflation Reduction Act (IRA) created new avenues of government support for farmers in 2022. The Emergency Relief Program (ERP) was established to provide assistance for widespread drought damage across the U.S. this year while the IRA provided assistance to distressed borrowers.
These non-COVID related ad hoc payments triggered a $7.8 billion annual increase in the “All other” category of government assistance in 2022.
Litkowski also pointed out that farmers’ insurance premiums increased in 2022. Government disaster aid provided lifelines for many farmers across the country this year. These two items need to open more dialogues about systemic risk management in the U.S. farming industry.
Specifically – is our current Farm Bill designed to adequately handle the growing volume of weather-related disasters experienced by farmers? Or are private insurers expected to pick up the tab for the increasing volume of weather and climate risks? Or have the ad hoc programs enacted in recent years provided an adequate source of risk mitigation to sustain farm profitability?
I don’t have the answers to these musings, but they are important factors to keep in mind – and to make sure your legislators are aware – as a new Farm Bill is debated in 2023. Climate risks are likely to keep growing so next year may be a good opportunity to evaluate the strength of the farm safety net with that systematic issue top of mind.
Balance sheet strengthens
Record profits are only steeling the U.S. farm balance sheet, as Litkowski explained on Thursday. “Farm equity has increased every year since 2019,” Litkowski shared, citing a 12% inflation-adjusted increase growth in equity since 2019.
Farm assets (both real estate and non-real estate) are forecast to increase 3.5% this year thanks in large part to rising real estate values.
The 2022 farm debt load was largely unchanged from 2021, with Litkowski noting only minor declines when adjusting for inflation. Litkowski also pointed out that non-real estate farm debt has been falling since 2018 but increasing land debt has meant that “the two types of debt are nearly cancelling each other out.”
But that is good for both equity and debt solvency prospects for U.S. farmers. In 2021, U.S. farm debt-to-asset and debt-to-equity values began shrinking for the first time since 2012, reflecting greater solvency management by U.S. farmers. In 2022, those ratios will continue to shrink which reflects even better solvency prospects for ag bankers.
In fact, bankruptcy filings are barely expected to reach 1 per 10,000 farms in 2022 – the lowest level since 2014. Even amidst an unprecedented volume of market uncertainty and staggering input cost increases over the past year, farmers are poised to endure 2022 on strong financial footing which is likely to spark successes well into the 2023 calendar year as well.
About the Author(s)
Grain market analyst, Farm Futures
Holland grew up on a dairy farm in northern Illinois. She obtained a B.S. in Finance and Agribusiness from Illinois State University where she was the president of the ISU chapter of the National Agri-Marketing Association. Holland earned an M.S. in Agricultural Economics from Purdue University where her research focused on large farm decision-making and precision crop technology. Before joining Farm Progress, Holland worked in the food manufacturing industry as a financial and operational analyst at Pilgrim's and Leprino Foods. She brings strong knowledge of large agribusiness management to weekly, monthly and daily market reports. In her free time, Holland enjoys competing in triathlons as well as hiking and cooking with her husband, Chris. She resides in the Fort Collins, CO area.
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