Farm Economy Outlook

January 2002

Farm-sector equity is expected to increase for the 16th consecutive year, even though prices for major grains remain relatively low.

During the 1990s, farmland owners experienced continued growth in equity, not only recovering the $188-billion loss of value that resulted from the mid-1980s farm crisis, but also adding nearly $200 billion in additional net worth.

The new decade has continued the trend of rising farm real estate values. Current evidence indicates that farm net worth will grow by about $17 billion in 2002.

Slide 2

Government payments, particularly emergency assistance, have bolstered returns from farming and increased farmland values in recent years. The value of U.S. farm real estate is expected to rise by about 1 percent in 2002. This is slower than the 4-percent annualized land value appreciation rate during 1998-2001.

Still, farmland values are expected to increase in real terms in 2002, rising at a rate that exceeds inflation for the 10 th consecutive year. Among the factors contributing to growth in land values are: net returns to farming, and demand for farmland for nonagricultural purposes such as housing and recreation.

Slide 3

Net cash income before government payments is expected to increase for the third straight year and exceed $40 billion for the first time since 1998. Improvement in market earnings is being driven by increases in both crop and livestock receipts. In 2002, livestock receipts will have increased over $10 billion and crop receipts $5 billion from their respective 1998 and 1999 lows.

With government payments assumed to be less than those made in 2001, the 2002 forecast for net cash income is 10 percent below the 5-year moving average, indicating a potentially tighter cash position for the sector.

The draw down in cash income relative to longer term trends is due entirely to the assumed reduction in government payments forecast for 2002, since market receipts will rise by an amount more than sufficient to offset the relatively small increase in production expenses.

Slide 5

Net farm income is forecast at $40.6 billion in 2002. This would be $8.7 billion less than 2001’s forecast (which included $9.1 billion in emergency assistance passed last summer) and $5.8 billion below the 1992-2001 average.

Supported by over $21 billion in government payments, 2001’s net income of $49.3 billion was exceeded only by the record $54.9 billion earned in 1996.

Growth in income during 1998-2001 exceeded changes in inflation and improved the farm sector’s earnings relative to the general economy.

Slide 6

Both Congress and the Administration have discussed additional payments for 2002. However, payments will likely be less this year than the $21 billion distributed in 2001.

Emergency assistance originating from special legislation comprised $9.1 billion of total government payments in 2001. Higher crop prices will result in nearly $1.3 billion less in loan deficiency payments, which were also a significant component of total payments in 2001.

Slide 7

The value of crop output will continue its 3-year pattern of growth, and livestock output value will also continue rising. Cash receipts are expected to be up about $1 billion for feed grains, cotton, and oil crops. Among the major crops, only cotton and rice have prospects of lower 2002 cash receipts.

Relatively low feed costs, strong domestic demand, and gains in export sales have encouraged higher pork and beef output. Receipts from dairy product sales are forecast to retract by $2.3 billion in 2002, but that follows a $4.1-billion gain last year.

Manufactured input costs, after 2 consecutive years of increases, should decline in 2002. Fuel expenses are forecast down 7 percent in 2001 and another 2 percent in 2002, and will be at their lowest level since 1998.

Fertilizer prices are slated to fall about 5 percent, while small increases will likely occur in pesticide prices.

Compensation for hired labor will continue to rise in 2002, while land rent and interest expenses will be less than in the last 3-5 years.

Labor expenses are expected to increase more than 3 percent, the result of a slight rise in total labor use and an increase in wage rates. This compares with higher (4-percent) increases during the preceding 5 years, and corresponds with changes in the national economy.

The reduction in interest expense will result from a slight decrease in real estate interest and a near 7-percent drop in non-real estate (short-term) interest. The decrease in both types of interest expenses is the first since 1993.

Despite an anticipated $4-billion increase in farm business debt, the U.S. farm-sector balance sheet is expected to improve slightly in 2002.

Anecdotal evidence suggests that farmers may be refinancing farm debt to take advantage of lower interest rates and, responding to tax incentives, converting nondeductible personal debt into farm business debt.

Reduced farm income levels in 2002 means that many farm operators will have less income available to meet their debt-service obligations. The maximum debt that farm operators could service with current income is expected to decrease by 10 percent in 2002. Coupled with the 2-percent rise in farm debt, farm operators’ use of their debt-repayment capacity (ratio of actual debt to maximum debt) is expected to rise from 60 percent in 2001 to 68 percent in 2002.

The projected 15-percent decline in farm-sector net cash income for 2002 will not be equally distributed across all farm operations.

Cash grain and soybean farm businesses are expected to have lower average net cash income, due largely to declining government payments. Corn, wheat, and soybean farms will have higher market receipts and lower expenses in 2002.

Higher earnings from commodity sales will not be sufficient to overcome the reduction in government payments for these farms. Payments that equaled about 20 percent of corn and soybean farm revenue and 30 percent of wheat farm revenue in 2001 are forecast to be about half their 2001 levels in 2002.

Income prospects for livestock farm businesses have been more favorable in recent years, although a combination of higher feed costs, lower payments, and for dairy and hog farms, lower receipts, may reduce 2002 earnings.

Beef farms will earn higher receipts and will most likely have stable expenses. But, these gains will not be sufficient to offset lower payments earned from participation in government programs.

Dairy and hog farms will face lower receipts, higher expenses, and lower payments, accounting for overall reductions in income in 2002 that resemble those for the major grain farms. Even if payments were restored to 2001 levels, these farms would still face lower incomes due to higher input costs and lower receipts.

The largest declines in average net cash income for farm businesses are expected in regions most dependent on government payments.

In the Prairie Gateway, Northern Great Plains, Heartland, and Mississippi Portal, higher market receipts and lower production expenses will not be sufficient to offset the reduction in government payments forecast for 2002.

In regions less dependent on government payments, average net cash income is expected to be relatively steady.

In the Southern Seaboard, Basin and Range, Northern Crescent, Eastern Uplands, and Fruitful Rim, changes in receipts and expenses tend to be offsetting. Government payments contribute less to income in these regions, leaving changes in the income forecast for 2002 at a more moderate level.

Farm households hold a wide variety of off-farm jobs and investments.

On two-thirds of farms, the operator, spouse, or both work at some off-farm job. Off-farm work is sought not just by operators of rural residence and other smaller farms.

Over 40 percent of spouses and 20 percent of operators of commercial-size farms hold off-farm jobs.

Farm households earn income from multiple and diverse sources of employment and investment. Households of commercial-size farms, though more dependent on farm earnings, draw income from wages, investments, and other businesses owned by the family. Off-farm wages and self-employment earnings are the most dominant sources of income for families operating intermediate and rural resident farms.

After rising each year in the late 1990s, farm household income leveled off last year and is expected to decline very slightly this year.

Farm operator household incomes are projected to be lower in 2002, the result of lower earnings from both farm and off-farm sources.

Slightly higher receipts, on average, combined with stable production costs will not be sufficient to overcome the lower level of government payments projected for 2002. The result will be lower cash incomes on average.

Off-farm earnings are also projected to be lower in 2002, reflecting changes in the general economy: lower interest rates and changes in job status can affect investment earnings and job wages.

 By Mitch Morehart, Bob McElroy, James Johnson

Economic Research Service, U.S. Department of Agriculture