Farm Cash Margins Expected to Tighten in 2006
Mitch
Morehart
James Johnson
USDA
Net income and value-added to the
U.S. economy from farming is projected to be less
in 2006 than in the previous year. Lower income
and higher expenses are predicted, with no one change
being the dominant reason for lower earnings. Purchased
inputs are forecast to be $4.9 billion higher in
2006; energy-based inputs such as fuel and fertilizer,
repairs, and other miscellaneous expenses account
for over four-fifths of the increase. Payments to
laborers, creditors, and landlords are forecast
at a record $49 billion, with most of the increase
over 2005 accounted for by interest payments and
rising labor costs.
Both crop and livestock production
values are projected to be just over 2 percent less
than in 2005. Feed and oil crops will contribute
most to the reduction, due to both lower prices
and production. Lower livestock values are expected
to stem from declines in the dairy and hog sectors.
Government payments to farmers and landowners are
also forecast to be about $4.5 billion less in 2006.
Net cash income, the difference
between farming’s gross cash income and cash
expenditures for production inputs, is forecast
to be $64.8 billion in 2006, following the record
of $85.5 billion in 2004 and $82.8 billion in 2005.
Net income from farm production and farm-related
economic activities is forecast to be $56.2 billion,
just above its 10-year average of $55.7 billion.
Still, this would be the fifth highest net farm
income ever recorded. Both U.S. crops and livestock
had record setting years for value added and receipts
in 2004-05.
Income outlook and financial circumstances vary
among farms
Lower prices, reduced marketings,
lower government payments, and higher input costs
could reduce the incomes of all farms, but especially
those that specialize in program crops such as corn,
soybeans, and wheat. Energy-based inputs and interest,
items expected to increase the most in 2006, account
for about 40 percent of costs in grain, oilseed,
and cotton production. Even though earnings are
expected to decline in 2006, farm business income
could remain well above the previous 5-year average
for soybean and peanut producers, and might nearly
match the 5-year average for rice and cotton producers.
The combined effects of a cost-price squeeze and
lower government payments may fall hardest on wheat
farms, whose operating margins have shrunk since
2003.
Livestock operations, other than
dairy, are projected to have smaller reductions
in income than for program crop farms. In contrast
with program crop farms, price declines are forecast
to be smaller, and quantities marketed are forecast
to be higher than in 2005, which should provide
more of a cushion against projected higher operating
costs. In addition, fuel, fertilizer, and interest
charges are a much smaller component (13-15 percent)
of total expenses on livestock farms. The largest
reduction in income (39 percent) among livestock
operations is projected for dairy farms.
Asset Values, Equity, and Debt Levels
Rise
Even though farm income is expected
to decline in 2006 from the record high levels of
2004-05, farm business assets, debt, and equity
values should continue to rise. The value of farm
assets is forecast to gain 5 percent over 2005's
forecast of $1.59 trillion. The value of farm real
estate, accounting for more than 80 percent of farm
assets, is expected to increase by 6 percent. The
rate of increase is expected to slow in 2006, and
return to the 4- to 5-percent range typical since
the mid-1990s (prior to the recent boom).
Farm business debt is expected
to rise 3 percent in 2006, approaching $123 billion
by year end. Sector equity (net worth) is expected
to rise more than 5 percent, as, in dollar terms,
the gain in asset values exceeds the increase in
debt levels by about $76 billion. Farm business
balance sheets have stabilized over the last 15
years. Debt-to-asset ratios have ranged between
15 and 16 percent since 1993, as increases in debt
typically have been offset by larger gains in farm
asset values. Because farm real estate values have
risen faster than farm mortgage debt, the degree
to which farmland is leveraged has declined slightly.
This has provided farm investors with an added equity
cushion to lessen the impact of any short-term declines
in income or asset values. Since 2003, farm sector
equity has increased by 23 percent, adding nearly
$272 billion in wealth to farm operators and land
owners.
Cash Operating Margins Will Remain
Relatively Tight
Longer-term
production and price projections suggest that
net cash income from farming will not be sustained
at the record levels of 2004-2005, but will settle
in the low to mid-$60-billion range. Receipts, although
projected to rise, are not likely to keep pace with
increases in production costs. Projections for all
sources of revenue, including government payments,
indicate that total cash sources of income will
increase slower than receipts, suggesting that farming
will earn a larger share of income from market sources.
Gross income is projected to increase slower than
production costs, keeping pressure on operating
margins and farm profitability. Tighter operating
margins than in recent years will place a premium
on farmers’ ability to manage resources and
adjust to economic conditions.
ERS Agricultural
Baseline Projections
For the full farm sector income forecast
link to:
Farm Income and
Costs Briefing Room
For the farm household income forecast
link to:
Farm Household Economics
and Well-Being Briefing Room
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