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A combine harvests corn Tyler Harris
DROP IN INCOME: Unfortunately, from the 2019 estimate of $3.8 billion, farm income in Nebraska in 2020 is projected to drop back to about $2.9 billion.

Reassessing farm income projections after COVID-19

Policy Report: While prospects for growth remain, it will take time to overcome lost opportunities.

In the midst of the ongoing COVID-19 pandemic, public health response and slow reopening of business activities, it can be difficult to assess the economic impact. For agriculture, there are so many factors affecting the outlook, including volatile market changes and uncertainties related to consumer demand, production and supply chain challenges, and pending government assistance.

COVID-19 impacts on agriculture

Assessing the impact of COVID-19 on demand includes both shifts in demand between food categories, as well as shifts in demand because of income changes. Before the widespread business shutdown and stay-at-home requirements, U.S. consumers spent about as much on food away from home as they did at home.

The dramatic shift to more at-home consumption meant a shift in demand across certain categories, including basic foodstuffs such as value cuts of meat, as opposed to high-end cuts traditionally consumed in a restaurant. While almost everyone may be ready to enjoy dining out again, there are questions as to whether any of the shifts in demand will have a lasting effect.

There are other issues, too, as the sharp contraction in the economy means lower income for many households and the resulting effect on consumption choices. The same consumer impacts happening in the U.S. also are occurring with consumers across the globe, ultimately affecting export demand for U.S. agricultural products as well.

The demand impacts for agriculture also are compounded by the dramatic decrease in energy consumption and motor vehicle fuel usage and a reported pullback in ethanol production (and corn demand for ethanol) of about 50%.

That pullback also affects agriculture on the production side, with reduced availability of distillers grains for feeders and even captured carbon dioxide for use in other manufacturing sectors, including food production.

Many other production and supply side challenges have occurred as well, with the shifts in demand backing up food supplies packaged for the hospitality, restaurant and institutional (HRI) market. Ongoing worker health concerns and temporary plant shutdowns have reduced total capacity in the meat and poultry processing sector.

Together, a drop in HRI demand in some markets and a hit to processing capacity in other markets have all hurt food animal producers and markets — whether it be for beef, pork, milk, eggs or poultry — resulting in backed-up production and even the need to euthanize some food animals because of a lack of market capacity and demand.

These impacts are difficult to assess with great precision right now, but they already have had a major effect on agricultural commodity values and farm income prospects. Agricultural commodity prices have fallen sharply since the beginning of the year, and particularly since mid-March.

As Congress developed a massive emergency spending bill to address losses in the general economy, they included agriculture assistance to be administered by USDA, as well as assistance administered through the Small Business Administration, for which agriculture also is eligible.

Of the $23.5 billion in the bill specifically for ag, USDA has thus far announced $16 billion in direct payments to ag producers and $3 billion of commodity purchases for food distribution programs, with general expectations that more will come later in the year.

Farm income projections

Putting all of these factors into the current outlook for agriculture and farm income is a challenge. USDA published its most recent national farm income estimates in February from late 2019 to early 2020 analysis, before the disastrous effects of COVID-19, but also before the positive news of a Phase 1 agreement with China promised some improved trade prospects. At that time, USDA’s national farm income forecast was $96.7 billion, up 3% over 2018.

A comparable forecast released in March from the Food and Agricultural Policy Institute at the University of Missouri had a projection for U.S. farm income in 2020 of $98.9 billion. The interesting and informative part of FAPRI’s analysis is that it also projected U.S. farm income to be 7% higher than that at $105.9 billion if there was full implementation of the Phase 1 trade agreement with China.

Then, COVID-19 intervened and an updated analysis from FAPRI provides a preliminary estimate of $85.8 billion for the year based on projected COVID-19 impacts. Instead of being up about 7% from the baseline scenario, U.S. farm income could now be down about 9%.

With these national numbers as a backdrop, a closer analysis of Nebraska farm income numbers provides some perspective on the current challenges. The official USDA estimate of 2018 farm income in Nebraska was $2.6 billion. An official estimate for 2019 will not come from USDA until August, but personal calculations based on an analysis of U.S. results in 2019, as well as other specific components, suggests farm income could rise as high as $3.8 billion in spite of the production challenges across the state in 2019.

The $1.2 billion increase from 2018 to 2019 is explained in part by some modestly higher commodity prices for the year, as well as an estimated $400 million increase in government payments.

Unfortunately, from the 2019 estimate of $3.8 billion, farm income in Nebraska in 2020 is projected to drop sharply back to about $2.9 billion in spite of another $500 million increase in projected government payments (including the recently announced USDA support).

In total, government payments in 2020 at a projected $1.6 billion could total more than 55% of net farm income, reinforcing the role that the federal safety net and emergency relief have had on providing support for agriculture in the present situation.

The big drop in farm income is primarily a function of the sharply lower agricultural commodity prices mentioned earlier. The farm income estimates reflect adjustments for 15% lower crop prices and 10% lower livestock prices for the year from USDA projections only 2 months ago.

The drop adds up to about a $2 billion decline in the value of crop and livestock production for the year, offset only in part by the increased farm program payments and the estimated decline in feed and purchased livestock costs. Whether those estimates will prove to be too big a drop for the year or not enough to fully recognize the current market challenges remains to be seen.

The projected farm income decline of about 24% year over year presents significant challenges for Nebraska farmers and ranchers, as well as the rural and statewide economy dependent on agriculture. The overall U.S. economy faces a significant contraction at the moment with forecasts in the neighborhood of a 5% to 6% decline in gross domestic product for the year.

A state such as Nebraska may have fared better to date than the nation as a whole with a larger share of the economy still operating during the COVID-19 shutdown, but with essential sectors facing their own workforce challenges and with a greater dependence on agriculture and agribusiness, the economic recovery from here forward looks more challenging and drawn out.

Prospects remain for consumer demand to rebound after COVID-19, and for trade opportunities to grow again as global economies restart, but it will take some time to overcome the lost opportunities of this year and the cumulative losses of the past few years. The only path through will be continued efforts to manage operations effectively, from production to people to risks.

Lubben is an Extension policy specialist at the University of Nebraska-Lincoln.

TAGS: COVID-19
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