It’s no secret that 2012 was a great year for many Southern farmers, with record yields and high prices for much-in-demand commodities.

But while the USDA projected in November that net farm income for the year would reach $114 billion — the third highest on record and more than 50 percent above the average for the previous decade — it was 5 percent below 2011 as production expenses rose faster than gross revenues.

Even with losses from the severe drought in the Midwest, high prices pushed U.S. gross farm income up by 2.8 percent, but production expenses were up 5.7 percent from 2011 levels.

Further, says Economist Gary Kauffman in the January report of the Federal Reserve Bank of Kansas City, the drought “exacerbated a widening gulf in profitability between the crop and livestock sectors. Livestock enterprises, including poultry and dairy, saw profits evaporate with crippling feed costs.” And with rising incomes in the crops sector, farmland values soared even higher.

But, he says, “the pendulum of farm profits may be about to swing,” with futures markets pointing to lower crop prices by the end of 2013. “If, and how quickly, the pendulum swings will depend on the weather. Given tight global supplies, volatile prices could persist.”

Despite higher crop prices, profits in 2012 were limited by higher costs, Kauffman notes. “The USDA reported that near double digit gains in seed costs and rising cash rents pushed planting costs higher, and as summer progressed, increasing energy costs raised fuel and irrigation costs.”

In the livestock sector, higher feed costs out-stripped revenue gains and slashed livestock profits. “After spiking 20 percent in 2011, feed costs jumped another 18 percent in 2012, forcing cattle and hog producers to liquidate herds at a faster rate than expected. The dairy sector also endured steep losses.”

After several years of strong prices, revenues for crop farmers “may shrink” this year, Kauffman says. “Futures markets suggest corn and soybean prices could fall by 10 percent to 15 percent by fall, with the potential for further declines depending on planting intentions.”

Better weather during this year’s growing season could lead to larger plantings, higher yields, bumper crops, and lower crop prices.

“With lower revenues and potentially higher costs, crop sector incomes could be noticeably lower than the 30-year highs in each of the past two years … If 2013 unfolds as 2012 was projected to unfold during planting season, crop incomes could fall significantly.”

Weather appears to be “the biggest risk” to current farm income projections, Kauffman says. “If normal weather patterns return, crop prices could tumble, benefiting livestock operations at the expense of crop producers.”

But “if rainfall doesn’t come soon, the drought and its effect on crop prices and livestock income could persist well into 2013. Given tight supplies, agricultural markets will remain volatile and farm profitability will turn on U.S. weather patterns.”

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