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2006 to present more challenges to farmers, USDA says

Net cash farm income is expected to decline by $18 billion or nearly 22 percent in 2006 because of higher crop stocks, lower crop prices and a modest decline in livestock and livestock product receipts compared to 2005.

But it could be worse considering the problems faced by U.S. farmers and the U.S. economy as a whole in late 2005, says USDA Chief Economist Keith Collins. Collins was one of the leadoff speakers at USDA’s annual Agricultural Outlook Forum in Arlington, Va.

“A year ago at this forum, what would you have thought about the health of the farm economy if I told you that in 2005 we would see record and near record crops for the second year in a row, multiple devastating hurricanes, soaring energy prices, continued loss of Asian beef markets and emergence of global avian influenza concerns?” he asked.

“You would have told me that the economy would be in deep and pervasive trouble. Instead, the farm economy seemed to respond with ‘What, me worry?’ Domestic demand for farm products soared, exports set a record high, U.S. farm income was the second highest ever and farmland values and farm wealth reached new all-time highs.”

Collins said there’s no doubt that the farm economy is pulling back from the strong crop prices and production levels in 2003 and 2004 and the record livestock and milk prices of 2004 and 2005.

With those higher stocks to work off, reduced farm-gate prices and slightly lower livestock and product receipts, USDA is forecasting that 2006 farm marketings will decline about $7 billion from 2005’s $239 billion. Two-thirds of the decline will occur in the row crop sector, says Collins.

“In 2005, government payments to producers were a record high $23 billion, increased by high marketing loan costs aggravated by the marketing system disruption caused by the hurricanes, increased counter-cyclical payments, ad hoc disaster assistance and tobacco buyout program costs.”

In 2006, payments to farmers are expected to decline by $4.5 billion due to lower ad hoc disaster payments and lower marketing assistance loan outlays. Cash expenses are expected to rise 4 percent in 2006, with energy and interest expenses expected to rise by more than $4 billion or 10 percent.

“So with revenues down and costs up, net cash farm income is forecast to drop from 2005’s level by $18 billion or 22 percent to about $65 billion,” which, he said, is about the average for the 10 years between 1995 and 2005.

USDA is forecasting that net farm income, U.S. farmers’ collective bottom line, will decline for all major types of crop and livestock farms and in all production regions. “Farm household income is also expected to decline for the first time in seven years, but at over $83,000 would still be 20 percent higher than in 2003 and well above the average of all U.S. households.”

Collins said a number of factors helped U.S. agriculture avoid a really bad year in 2005: Strong global demand for food, the flexibility of the agricultural system to rebound from shocks, a substantial increase in government support spending and cyclically tight markets for some commodities, such as meat.

USDA economists believe the stage is set for another year of strong demand for agricultural products. The U.S. economy grew at a “more sustainable” 3.5 percent in 2005, down from 2004’s 4.2 percent, Collins notes. “For 2006, despite slower consumer spending, we expect U.S. DGP to rise by around 3.5 percent, led by business spending, including higher inventories and capital investment and by rising exports.”

Foreign economic growth, on the other hand, “retreated a little in 2005,” he said. “This year Western Europe is expected to have the strongest growth since 2000, and growth prospects now appear good in Canada, Japan, East Asia and Mexico – all important markets for U.S. agriculture.”

Overall, foreign economic growth is expected to rise to 3.3 percent in 2006, the strongest since 2000.

The latter is expected to help push farm exports to a record-high $64.5 billion, up $2 billion from 2005’s record of $62.5 billion. Imports are forecast at $63.5 billion, up $2 billion, which would leave a surplus of $1 billion for fiscal year 2006.

“While the agricultural export-weighted value of the dollar appreciated in 2005, at the start of 2006, it remains over 10 percent below the level at the start of 2003,” says Collins.

“The current period of strong foreign economic growth and continued effects of the decline in the value of the dollar from several years ago should show up in higher U.S. agricultural exports in the future and an improving trade balance. Projected economic growth suggests continued increases in agricultural exports and imports with the agricultural trade balance forecast to be positive but less than in past years.”

In 2004, farmers worldwide harvested record-high grain, oilseed and cotton crops. Because of tight supplies from the 2003-’04 marketing year, 2004 was a transition from lower stock levels, lower government farm program costs and higher prices to higher stock levels, higher farm program costs and lower market prices.

“Often, these transitions to lower prices have been followed by several years of lower prices,” said Collins. “At the outset, the 2005-’06 marketing year is following a similar pattern.”

In 2005-’06, the United States is again enjoying record or near-record production for major crops, adding to the stocks levels built up last year. As a result, U.S. supplies for feed grains, cotton and soybeans are record high this year, although not for wheat.

On the plus side, world grain consumption this year is expected to exceed last year’s record high and slightly exceed reduced world production, as grain crops in the United States, Argentina and the European Union. “This is expected to lead to a drawdown in world grain stocks, with world stocks as a percent of total use not excessive,” says Collins.

The picture for oilseeds will be different, however, with global oilseed production forecast to reach a record high for the tenth consecutive year. This year’s increase is expected to exceed the increase in consumption, leading to higher global stocks. For soybeans, global stocks as a percent of use are projected to exceed the high set in 1986.

Rice may be one of the brighter spots in the U.S. crop outlook, said Collins.

“Despite a near-record crop, a sharp increase in exports is moving the U.S. rice market into balance with only a slight rise in stocks from two years ago,” he notes. “Rice ending stocks are forecast at 26.5 million hundredweight. Medium grain stocks at 5.25 million hundredweight are the tightest on record (since 1982-83, the first year of supply and use statistics).

“The global rice market is a major factor behind exports and steady prices, as global ending stocks are expected to be the lowest since 1982-83, with the stocks-to-use ratio the lowest since 1874-’75.”

On balance, Collins says, a return to average national farm income, lower enterprise and regional farm income, lower cash margins, higher net worth and greater utilization of debt repayment capacity could lead economists to several conclusions.

“There is not an impending financial crisis in U.S. agriculture, yet there will be greater financial stress for an increasing number of crop producers in many regions,” he said. “That stress is likely to show up in tighter credit standards and delayed loan repayments and loan extensions.

“The coming year will present more of a financial challenge for U.S. agriculture than in recent years. In addition, agriculture will have to contend with questions over the effect of rising interest rates on the durability of the U.S. economic recovery, the value of the dollar, issues raised by the federal budget deficit, trade negotiations, bird flue, BSE. Oil prices, Middle East issues and terrorism.”

He said producers will “likely need to draw more on their resiliency and managerial capabilities in 2006 than during the past couple of years of abnormally high farm income.”

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