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U.S. net farm income forecast to be down for 2006

It won’t come as a surprise to Southeastern farmers, who saw profit margins diminished this past year by poor yields and rising energy costs, but the USDA has estimated that net farm income will be down for 2006 as compared with 2005.

In its latest report, USDA’s Economic Research Service predicted net farm income to be $58.9 billion in 2006, down from $73 billion in 2005, but still slightly more than its 10-year average of $57.2 billion.

The primary reasons for the anticipated decline are a drop in the value of livestock production and direct government payments combined with an increase in the cost of inputs. Net cash income is forecast to be $66.6 billion in 2006, a decline from the high levels achieved in 2004 and in 2005. Family farm operator household income is expected to decline by 0.9 percent in 2006, as the decrease in farm income more than offsets an increase in off-farm income, according to the report.

Farms are expected to contribute $107.6 billion in net value-added to the U.S. economy in 2006, down substantially from the 2004 peak year of $128.9 billion. Net value added is the sum of net farm income and payments made to agriculture’s stakeholders (lenders, hired labor, and non-operator landlords).

The value of production in the U.S. farm sector is forecast to be $279.5 billion in 2006, up $4.1 billion over 2005. The 10-year average is $237 billion. The value of crop production is projected to be up $7.1 billion over 2005, benefiting primarily from higher projected corn prices and stronger sales of vegetables, fruits and nuts and greenhouse/nursery products.

The value of livestock production is expected to be down $4.7 billion from 2005, but still $18.9 billion above its 10-year average. Farmgate prices for most major livestock products are expected to fall from 2005, with milk prices declining the most.

Total direct government payments are expected to total $16.5 billion in 2006, down from the $24.3 billion for 2005. This payment total is nearly 4 percent below the five-year average. Direct payments under the Direct and Counter-cyclical Program (DCP) in 2006 are estimated at $5.2 billion, less than a 1-percent increase from 2005.

Total production expenses in 2006 are forecast to rise by $11 billion (5 percent) to a record $237.3 billion. The percentage change is less than in 2005, but continues the increase in total production expenses that has occurred in each of the last four years. Since a decrease in 2002, total expenses in current dollars will have risen $43.8 billion (22.7 percent).

Through October 2006, prices paid overall for crop sector inputs had risen faster than for livestock sector inputs.

Farm sector equity is expected to rise by about 7 percent in 2006, as the value of farm assets continues to rise more rapidly than farm debt, driven mostly by increases in farmland values. Debt-to-asset and debt-to-equity ratios continued to improve in 2006, compared with the first half of this decade and the average performance over the past four decades.

Net farm income is forecast to be $58.9 billion in 2006, down from $73.8 billion in 2005 but above its 10-year average of $57.2 billion. The projected decline in farm income from the record levels of 2004 and 2005 (when both crop and livestock commodities experienced exceptionally favorable market and/or production conditions) results from several components on both the income and expense sides of the ledger.

The value of the sector’s production in 2006 is forecast to be up $4.1 billion from 2005, with production forecast to be up $7.1 billion for crops, down $4.7 billion for livestock, and up $1.7 billion for the value of services and forestry. Government payments, the other component of gross farm income, are forecast to decline $7.8 billion.

Purchases of manufactured inputs are forecast to rise by $2.4 billion from 2005 due to higher fuel and fertilizer prices, with the latter resulting from high prices for natural gas. Payments to stakeholders (lenders, hired labor, and non-operator landlords) are forecast to be up $2 billion, led by rising interest payments on debt and higher expenditures for labor. Expenditures for all purchased inputs are forecast to be up 8.6 percent in 2006.

Expressed in constant dollars, the net farm income forecast for 2006 is $50.7 billion—below its 10-year average of $55.9 billion by $5.2 billion. Still, it is higher than the $48.4 billion averaged over 1998-2002 prior to the farm income spike in 2003-05. Inflation-adjusted gross farm income in 2006 of $254.8 billion exceeds its 10-year average of $247.9 billion by $6.9 billion, but real production expenses more than offset that as the $204.1 billion incurred in 2006 exceeds its 10-year average of $192 billion by $12.1 billion.


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