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Net farm income and agricultural trade value

Net farm income could see a 32 percent drop in 2015
<p>Net farm income could see a 32 percent drop in 2015.</p>
The fall in net farm income represents a drastic 32 percent drop over last year

According to a report prepared for members and committees of Congress by the Congressional Research Service, national net farm income for 2015 is expected to amount to just over $73.6 billion compared to last year's $108 billion. The report is based on the United States Department of Agriculture's (USDA) Economic Research Service's (ERS) U.S. Farm Income Outlook for 2015.

The fall in net farm income represents a drastic 32 percent drop over last year. Meanwhile, net cash income has also fallen, projected to be down 22.4 percent in 2015 to $89.4 billion.

The drop in net farm income is being blamed on expected lower crop and livestock receipts, down a combined 6.3 percent. Also, a drop in cash receipts is expected in spite of record corn and soybean harvests in 2014, largely because of falling commodity prices, mostly in the second half of 2014.

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The Agricultural Act of 2014 eliminated direct payments to farmers, nearly $5 billion a year, and replaced them with price and revenue support programs including a Price Loss Coverage (PLC) program and the Agricultural Risk Coverage (ARC) program that relies on an average price trigger for producer payment calculations. PLC and ARC are expected to provide an estimated $6.2 billion in farm payments this year, more than offsetting the drop in direct payments.

During a period of strong U.S. farm income beginning in 2011, agricultural exports and strong commodity prices fueled cash receipts. But while agricultural exports tripled since 2000, they are expected to falter in 2015, down an estimated 6 percent compared the last year.

Not all bad news

The report, delivered to Congress Feb. 18, presents a look at what farmers and ranchers can expect this year, not all of which is bad news. For instance, despite the outlook for lower farm income in 2015, farm wealth is projected to remain at record levels. Farm asset values—which reflect farm investors’ and lenders’ expectations about long term profitability of farm sector investments—are projected up slightly (0.4 percent) in 2015, reflecting a leveling off of the previous year’s strong outlook for general farm economy.

Also of note, the report indicates the outlook for lower commodity prices in 2015 has slowed the previously rapid growth of farmland values. At the farm-household level, average farm household incomes have surged ahead of average U.S. household incomes since the late 1990s. In 2013 (the last year for which comparable data were available), the average farm household income of $118,373 was about 63 percent higher than the average U.S. household income of $72,641.

The outlook for lower net farm income, coupled with record farm wealth, suggests a mixed financial picture heading into 2015 for the agricultural sector as a whole, with substantial regional variation. Declining prices for most major program crops signal tougher times ahead, and considerable uncertainty surrounds producer participation in the new safety net programs of the 2014 farm bill.

Eventual 2015 agricultural economic well-being will hinge greatly on the crop choices made this spring, growing conditions during the spring and summer, and harvest-time prices, as well as both domestic and international macroeconomic factors, including economic growth and consumer demand.

Ten Year Projection for U.S. Farm Income and Agricultural Trade Value

According to USDA-ERS figures, projected reductions in prices for most major crops will result in declines in export values in 2015 and farm cash receipts in 2015-16. Export values and cash receipts then grow over the rest of 10-year projection period as steady domestic and international economic growth, continued stability of the U.S. dollar, and production of biofuels support longer term demand for U.S. agricultural products.

Farm production expenses are projected to increase again after 2016 and direct Government payments fall from 2016 to 2019, so net farm income is expected to continue declines from those noted in recent record highs.

Other factors expected to influence both long range farm income and trade value:

  • Total direct Government payments are projected to rise sharply in 2016, largely reflecting lower crop prices that push up payments under the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs of the Agricultural Act of 2014. Government payments then fall for several years as commodity prices begin to rise, before averaging close to $10 billion annually during 2020-24.
  • Farm production expenses fall in the first two of ten projection years as lower prices for crops and crude oil, along with reduced acreage, lead to declines in expenses for farm-origin inputs and manufactured inputs. Expenses increase after 2016 as prices for grains, oilseeds, and crude oil rise.
  • Acreage enrolled in the CRP is assumed to decline to less than its legislative maximum of 24 million acres under the Agricultural Act of 2014. As crop prices begin to rise again, average rental rates for land in the CRP will also increase. As a result, CRP payments are projected to increase from about $1.8 billion in 2014 to $2.4 billion in 2024.
  • Payments under the ARC and PLC programs rise sharply in 2016, reflecting reductions in crop prices from relatively high levels of recent years. These payments then fall for several years as commodity prices begin to rise, but then jump again in 2020 as some producers are assumed to shift to PLC. (The initial producer election of ARC or PLC under the Agricultural Act of 2014 covers 2014-18 crops. For projections beyond those years, another enrollment election is assumed to be available for 2019-24 crops.)

U.S. Crops

Planted area for major field crops in the United States is projected to decline over the next several years as U.S. and global supplies rebound from relatively low levels in recent years and prices decline for most crops. As a consequence of the associated lower producer returns, U.S. planted acreage for eight major crops (corn, sorghum, barley, oats, wheat, rice, upland cotton, and soybeans) is projected to fall from a 2012-14 average of about 257 million acres to about 246 million in 2017.

Over the long run, steady global economic growth provides a foundation for strong crop demand. Combined with some further expansion of global biofuel production and continued stability of the dollar, overall projections indicate longer run gains in world consumption and trade of crops.

Although crop prices are projected to be below highs of recent years, they remain above pre-2007 levels. The eight-crop plantings in the United States remain steady near 246 million acres during the second half of the projections, with increasing yields providing most of the gains in U.S. production.

Farm programs of the Agricultural Act of 2014 are assumed to be extended through the projection period. Acreage enrolled in the Conservation Reserve Program (CRP) is assumed at levels slightly below the legislated maximum of 24 million acres.

U.S. Livestock

The livestock sector is projected to adjust to lower feed costs, with stronger producer returns providing incentives for increasing production. Additionally, the pork sector rebounds from reduced production in 2014 that largely reflected effects of Porcine Epidemic Diarrhea virus (PEDv). Production expansions for pork and broilers are projected for the full projection period.

Beef production increases begin in 2018 as near-term declines in output are exacerbated as more heifers are retained to build beef cow inventories rather than fed for slaughter. As a result, total U.S. red meat and poultry production is projected to rise over the projection period. Milk production also increases over the next decade.

Lower feed prices than in the past several years raise producer returns and, coupled with

improved pasture, provide incentives for increases in beef production. Retention of heifers for breeding, however, leads to declines in beef production through 2017. Beef production then rises in the remainder of the 10-year projection period as returns support continued herd expansion.

Beef cow numbers rise from about 29 million head at the start of 2015 to more than 33 million toward the end of the 10-year projection period. The total cattle inventory rises from below 88 million head to about 94 million in 2024. Rising slaughter weights also contribute to the longer term increases in beef production.

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