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Income gains may be offset by lower payments

Despite a decline in the U.S. dollar by historical standards and trade competition from Brazil, Argentina, and the Black Sea region that are constraints on the growth of some agricultural exports, improving economic growth – particularly in developing countries – is providing a foundation for gains in global consumption and trade, U.S. agricultural exports, and farm commodity prices, according to agricultural baseline projections to 2013.

Strengthening market conditions will also lead to rising prices, increases in gross farm income, and “improvement in the financial condition of the U.S. farm sector,” the report notes. But net farm income is expected to decline through much of the period from the high level of 2003, reflecting lower government payments and adjustments in the cattle sector.

The projections, released at the annual USDA Agricultural Outlook Forum at Arlington, Va., also indicate increases in domestic demand for meat, feeds, horticultural products, corn used in ethanol production, and food use of rice.

As a result, the Interagency Agriculture Projections Committee notes, “market prices and cash receipts will rise, helping to improve the financial condition of the U.S. agricultural sector.”

Consumer food prices are projected to continue a long-term trend of rising less than the general inflation rate and the trend in increased consumer spending for meals eaten away from home is also expected to continue.

The baseline projections cover agricultural commodities, agricultural trade, and aggregate indicators of the sector, such as farm income and food prices, and assume there are no shocks due to abnormal weather or other factors affecting global supply and demand. They also assume the 2002 Farm Act will remain in effect through the period.

The value of U.S. agricultural exports, which fell from a record of almost $60 billion in fiscal year 1996 to $49.1 billion in 1999, is projected to exceed the prior record in the period 2005-2013. However, agricultural imports are expected to rise by about the same amount, with the agricultural trade surplus “relatively stable in a $10 billion to $12 billion range.”

Economic gains and population growth in developing nations are expected to generate most of the increase in global food demand over the next decade, the analysts say.

“Economic growth in developing countries is important for global agricultural demand, because many of these countries have incomes at levels where consumers diversify their diets to include more meats and other higher-value food products, and where consumption and imports of food and feed are particularly responsive to income changes.”

The strength of the dollar is a constraining factor for U.S. agricultural competitiveness and growth, the report notes, and the projections are based on the assumption that the dollar will stay at historically strong levels as financial market returns attract more money into the U.S.

Competition in global agricultural markets “will continue to be strong, with expanding production in a number of foreign countries.” Increasing exports of soybeans and soybean meal from South America “reflect a continuing conversion of land to crop production, particularly in Brazil.”

Global wheat trade competition will continue with traditional exporters – Australia, Argentina, Canada, and the European Union – as well as more recent competitors from the Black Sea region. Brazil and Canada will continue to compete against U.S. port exports, while U.S. exports of broilers will face “strong competition” from Brazil and Thailand.

Gross cash income for U.S. farmers will “gradually increase,” the report says, as crop and livestock receipts rise due to growing domestic and export demand.

Production expenses are projected to increase at slightly less than the general inflation rate, with cash operating margins “tightening somewhat” as cash expenses rise from 75 percent of gross cash income in 2004 to about 78.5 percent by 2013.

Government payments will “become relatively less important over time, as a greater share of gross cash income comes from the marketplace.”

Net farm income projections for the next decade average about $51 billion, compared to $47.6 billion in the 1990s. Income is projected to increase toward the end of the period, reaching $51.5 billion in 2013.

Increasing gross cash income and relatively low interest rates through the period will assist farmers in asset accumulation and debt management, the analysts say. Debt-to-asset ratios are expected to decline to about 14 percent in the last several years of the period, compared to more than 20 percent in the mid-1980s and 14.7 percent in 2003.

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