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Briefing Rooms

Farm Income and Costs: 2008 Farm Sector Income Forecast

Contents
 

2008 Net Farm Income Is Forecast To Be At Record Level

In 2007, net farm income was at a record level and ended the year strong with many key economic indicators at very favorable levels. Commodity prices were above recent levels and in some cases (wheat, soybeans, corn, milk) continued to rise. Exports were strong as the weak dollar made U.S. commodities more competitive in international markets, and ending-year stocks of many commodities were low. Consequently, the outlook for the farm economy as a whole is for another very good year in 2008, driven by strong demand for feed crops, oilseeds, and food grains.

There are a lot of unknowns when forecasting farm income in the first quarter of the year, but based on the best information available on production and market conditions, the farm sector's net value added to the national economy is forecast to be up 4.7 percent in 2008. Its projected value of $144.1 billion would be $6.5 billion over 2007 and 38 percent over its 1998-2007 average.

Net farm income is forecast to be $92.3 billion, up 4.1 percent above the $88.7 billion farmers are estimated to have earned in 2007 and 51 percent above the 10-year average of $61.1 billion.

Net cash income at $96.6 billion is forecast to be $9 billion above 2007, which was the previous record for net cash income. Net cash income is projected to rise more than net farm income because of the large carryover of crops harvested in the prior year, which will be sold in 2008.

Net value added, 1997-2008f d

The story for 2008 is the value of crop production which, at $175.5 billion, is forecast to exceed its previous record (attained in 2007) by $25.9 billion, a 17-percent increase. Prices of major crops (corn, soybeans, wheat) were trending upward in late 2007 and are expected to maintain those gains in early 2008 and perhaps go higher.

The values of livestock production and livestock cash receipts are projected to decline about 2 percent in 2008. Small declines are projected in the value of production for all major livestock sectors (cattle, hogs, poultry, dairy).

The value of both crop and livestock production have not only trended steadily upward since 1970 but have been roughly equal over the period. However, the year-to-year movements in the two measures have not always been synchronized and 2008 is projected to be one of those years in which they move in opposite directions, as the value of crop production surges upward.

Feed costs are a large component of expenses in producing livestock and their products (milk, eggs), and the exceptionally high prices for feed crops are pinching livestock producers. Rising costs cause livestock producers to look for ways to increase profits at the margins, so they eliminate the least productive animals and cut back in the less profitable areas of their operations.

Net value added and net farm income have followed the value of commodity production over both the long term and in year-to-year fluctuations. Because farmers typically do not vary their production mix dramatically from year to year, production costs tend to be comparatively stable. Thus, the direction and magnitude of annual changes in the value of livestock production arises primarily from market prices for livestock and products. Variability in the value of crop production is determined by both market prices and production levels. The volatility in crop production primarily derives from unpredictable variability in yields due to weather, plant disease, and pests.

Value of crop production and livestock production, 1970-2008f d

See our glossary for definitions of terms.

See the official USDA estimates and forecast tables.

Commodity Prices Boost Farm Income

In general, 2008 is projected to be an exceptional year for U.S. crop producers, particularly of feed crops, oil seeds, and food grains. In the livestock sector, the prices available to producers for cattle and milk are expected to remain well above their average over the last 10 years. The boost in 2008 U.S. farm income is primarily the result of high commodity prices. Prices for a number of major commodities rose throughout 2007, and attained unexpectedly high levels for corn, wheat, soybeans, and milk. These higher prices are principally resulting from strong demand from the domestic biofuels industry and from foreign buyers. As a result, farmers have lots of production to sell at high prices (see monthly prices for Crops and Livestock).

The growing use of major crops in the production of biofuels has increased the demand for these commodities and contributed to upward pressure on commodity prices. Corn producers are the primary beneficiaries, but soybeans are also used in producing biodiesel. Prices of other feed crops and oilseeds have also risen as corn and soybean consumers have looked to substitute commodities to mitigate the effects of rising corn/soybean costs. Inadequate rainfall in competitor countries and increased international consumption (from growth in population and rising incomes) have reduced world supplies and inventories for corn and soybeans.

The combination of reduced global food supplies and higher incomes in developing countries with large populations is translating into rising effective demand for farm commodities, regardless of origin. In addition, the U.S. dollar has depreciated significantly against major foreign currencies in recent years. The lower value of the dollar amounts to greater effective demand for U.S. exports, boosting farm-level prices to a level that more than offsets the increase in production costs. On the other hand, the lower value of the dollar increases the costs of imported production inputs, particularly fuel and fertilizers (nitrogen and potash).

U.S. corn production, 1990-2008f d

U.S. soybean production, 1990-2008f d

The income earned from production activities in the farm sector, as measured in net value added, is distributed among stakeholders (rent, wages, interest) and producers for their contributions of land, labor, capital, and management acumen. The incomes to be earned by stakeholders are agreed upon in advance of their contribution to the production activity. Consequently, their earnings are not subject to the vagaries of markets and production. The lack of variability in their earnings is in contrast to the sawtooth pattern of net farm income.

Producers, who receive their share from net farm income, bear the inherent risks of both their own production and the prices generated by global markets. As such, producers bear the brunt of losses when production and prices decline and reap the gains in years when production and price are above average.

Payments to stakeholders and net farm income, 1970-2008f d

Production Costs Are Also On The Rise

The rise in commodity prices boosts gross farm income, which is forecast to rise 7.5 percent in 2008 and to be 38 percent ($103 billion) above its average over the prior 10 years (1998-2007). Production expenses are forecast to exceed their 10-year average by 34 percent ($71 billion), partially offsetting the rise in gross farm income. Net farm income is the difference between gross farm income and production expenses. As a consequence of revenues increasing more than expenses, net farm income in 2008 is forecast to be 51 percent ($31 billion) above its 10-year average.

Net farm income, 1997-2008f d

Net farm income--Ratio of current year to 10-year moving average d

Net cash income is forecast to be $96.6 billion in 2008, up 10.3 percent from 2007 and $29 billion above its 10-year average. The primary difference between the year-to-year rise in net cash income and net farm income is a $5-billion sell-off of inventories in 2008, of which $4.8 billion is from a drawdown in crop inventories, reflecting the big carryover for delayed sale of the large harvests in late 2007. Large crop harvests tend to overload transportation and marketing facilities, depressing commodity prices and increasing incentives to delay marketing until the glut of commodities has been absorbed after the end of the year.

After dropping back to near its 10-year moving average in 2006 and rebounding to a new record in 2007, net cash income in 2008 is now forecast to rise another 10.3 percent due to a surge in cash receipts for crops. Net cash income (cash income earned after out-of-pocket expenses) is money available to pay debt obligations, taxes, and family living expenses. It is an indicator of the farm sector's cash flow and liquidity.

Net cash income typically fluctuates less year to year than net farm income because farmers manage year-end inventories in order to level out sales receipts (cash income) and thus manage income tax liabilities. Historically, crop production has been the source of much of the volatility in income. Fluctuations in the value of changes in inventories are not reflected in net cash income. However, 2008 is expected to be an exception as the delayed sale of the carry-over from the 2007 harvests into 2008—combined with higher prices for soybeans, corn, and wheat—give a substantial boost to receipts from crop sales.

In recent years, livestock prices have been the source of higher than usual volatility in both net farm income and net cash income. In 2004 and 2005, market prices for livestock and products were generally favorable for producers. In 2006, these prices trended down but in 2007 they turned sharply upward, particularly for milk and poultry (see annual prices for Crops and Livestock). For 2008, the forecast is for prices of livestock and products (milk, eggs, etc.) to level off and maybe drift down a little.

Net cash income, 1997-2008f d

Since about 1990, net cash income has not been as volatile as in earlier decades. A continual upward trend in crop yields has contributed to higher production. Increasing populations and rising standards of living throughout many developing countries have kept demand strong for U.S. agricultural commodities, both crop and livestock. This combination has resulted in consistently higher net cash income over the last two decades, as evidenced by net cash income generally exceeding its 10-year moving average. In 3 of the last 4 years, farm earnings have spiked well above the average.

Net cash income--Ratio of current year to 10-year moving average d

Not All Farmers Share Equally in Income Gains

Because of the diversity of production in U.S. agriculture, change is not equally distributed over commodities or regions. States that are leading producers of corn, soybeans and wheat stand to benefit the most with prices for their production rising faster than most other commodities and their expenses rising roughly in line with those for other crops. Thus, the Midwest and Corn Belt should be the big beneficiaries. Livestock producers are expected to experience greater increases in production expenses than crop producers due to their heavy reliance on feed. Feed prices should be propelled upward by the rise in prices for feed grains and oil crops.

A number of States in the East, Southeast, and Mountain regions are experiencing drought. For the most part, these States do not account for enough farm production to have a major impact on national farm income measures. However, farmers in regions with significantly lower levels of production benefit less from high commodity prices since they have less to sell.

Farmers in these regions are also typically seeing a greater rise in production costs for such things as irrigation and feed/hay. When gross farm income is lower and production costs are higher, net income for individual producers can quickly turn negative for operations mired in drought conditions.

A winter cold snap in Florida has reduced its citrus crop, but the extent of production loss is not yet known. Any loss in supply will likely see a corresponding rise in market prices available to those producers who have commodities to sell. Consequently, the effects on farm income at the national level are not likely to be substantial, even though it could be significant for those producers hit hardest by the damage to both fruit and trees.

Production Expenses

After a projected increase of $24.5 billion ( 10.5 percent) in 2007, total production expenses are expected to rise another $22.2 billion (8.6 percent) in 2008 to a nominal record-high $279.2 billion. If realized, expenses will constitute 75.0 percent of gross farm income, slightly more than in 2007. The 2008 increase will be the sixth straight gain since 2002.

Farm expenses, 2002-2008f d

Since 2002, nominal expenses will have risen $86.8 billion (up 45 percent). Inflation-adjusted expenses, however, should remain below the levels reached in 1979-81.

Nominal and inflation-adjusted expenses, 1975-2008f d

Only two expense items are forecast to decrease: livestock/poultry purchases and nonreal estate interest. Crop output is expected to increase 2.6 percent and livestock output 1.8 percent, producing a net rise of 2.3 percent in total output. The price level of all production inputs combined is forecast to increase 6.3 percent.

For the third straight year, feed expenses in 2008 are forecast to have the largest increase of all expenses as they rise $6.9 billion (18.2 percent) to a record-high $45.0 billion. This increase is similar to the $7.6-billion (24.8 percent) jump in anticipated 2007 feed expenses. The primary cause of the rise in feed expenses is the projected increase in corn and soymeal prices. Corn accounts for 91 percent of feed grains used for feed and soymeal is the principal oil crop product used as feed. At the end of 2007, corn prices were at record levels and they are forecast to continue climbing throughout 2008. Soymeal prices are also at record levels and are projected to remain high. The number of grain-consuming animal units (GCAUs) is forecast up 1 percent. Cattle-on-feed are expected to be lower each quarter in 2008 than they were in 2007, but net placements should decline just marginally. Production of hogs and milk are expected to increase about 2 percent, and the production of broilers should be up as well.

Livestock and poultry purchases are forecast to decline around $900 million (4.7 percent) in 2008. Cattle and calf purchases account for most of this expense. Prices of feeder cattle fell in both 2006 and 2007 because drought and the resultant poor pasture in some parts of the country pressured cattle into feedlots. This pressure has been partially relieved and cattle slaughter in 2008 should remain level, but high feed prices have pushed the profitability of feedlots down and reduced the price for feeders. An example of this downward pressure is the 16.5-percent drop in the price for Oklahoma City feeder steers since September 2007. The price for milk cow replacements rose 6 percent in 2007 and should remain at least level during 2008 since milk production will increase and milk prices should remain high. But farm prices for hogs, broilers, and turkeys are forecast down.

Principal crop-related expenses are forecast to rise $4.5 billion (up 12 percent). This increase is nearly identical to the increase in 2007. One indicator of crop-related expenses, acres planted of the principal 14 field crops, is projected to be up 2.1 percent.

Seed expenses are forecast to increase around $500 million (up 4 percent) in 2008. In contrast, seed expenses rose estimated $1.5 billion (13.9 percent) in 2007. Seed prices have been rising rapidly since 2000 because of bio-technology advancements and the resultant improved yield potential. (Crop Production Costs and Outlook, FAPRI). The increase in seed prices was particularly rapid in 2007, when they rose 12.3 percent. This rise is projected to slow in 2008 to 2.0 percent. Also, the cost of seed for soybeans is less than for corn. With an increase in soybean acres and a drop in corn acreage projected for 2008, farmers will have lower expenses per acre.

Fertilizer expenses may be a greater concern to farmers than fuel costs in 2008. Following a $2.7-billion increase in 2007 (up 20.2 percent), fertilizer expenses are forecast to rise $3.0 billion (18.4 percent) in 2008. Increases in fertilizer prices are helping to drive the increase in expenses. In particular, the prices for potash and phosphate rose nearly 57 percent during 2007. Overall fertilizer prices rose 6.6 percent during the last 2 months of 2007, and are projected to rise 16 percent in 2008. These prices are not likely to fall during the year because their rise is tied to greater international demand for fertilizer, particularly in India, China, and Brazil. (A fuller discussion of the fertilizer price situation is included in the November 2007 Amber Waves.) With the drop in corn acreage, fertilizer use should be less. Multiplying forecast acreage for principal crops and their respective per-acre application rates yields a 1.3-percent decrease in total applications. Many farmers will likely continue to use practices that minimize fertilizer use but that may not offset the higher application rates by producers seeking to maximize yields to take advantage of high commodity prices.

Pesticide expenses are forecast to increase around $1 billion (11 percent). Prices paid for pesticides are projected to increase 8.9 percent in 2008. Multiplying forecast acreage for principal crops by their respective per-acre pesticide application rates yields a 0.5-percent decrease in total applications.

Fuel and oil expenses are forecast to increase $1.6 billion (12.6 percent) in 2008 following a $1.3-billion (11.5 percent) rise in 2007. Fuel prices are projected to rise 10.3 percent and the additional acreage will increase use. Like fertilizer prices, fuel prices have risen dramatically since 2002. Nominal annual average fuel prices have registered six straight double-digit percentage increases and, since 2002, are projected to have risen 159 percent through the end of 2008. Electricity rates should rise almost 2 percent, which, combined with the increase in total output, should push electricity expenses up 4.0 percent.

Payments to Stakeholders

Payments to stakeholders are slated to increase $2.9 billion (5.8 percent) in 2008. Employee compensation (hired labor) is forecast to rise $1.2 billion (4.7 percent) due to a 2.4-percent increase in farm wage rates and the 2.3-percent increase in total output. Net rent is expected to rise $1.7 billion (17 percent) as the result of increases of 10 percent in cash rent, 17 percent in share rent, and 24 percent in landlord government payments. Interest expenses will be nearly the same in 2008 as in 2007 due to an offsetting increase in real estate interest and decrease in nonreal estate interest. Real estate debt is forecast up $3.9 billion (2.8 percent) and nonreal estate debt up $4.8 billion (4.6 percent). Annual average interest rates on outstanding real and nonreal estate farm loans are expected to decline during 2008.

Government Payments Forecast at $13.4 Billion

Direct government payments are expected to total $13.4 billion in 2008, up from the $12.0 billion paid in 2007. This level would be 20 percent below the 5-year average for 2002-2006. Direct payments under the Direct and Countercyclical Program (DCP) in 2008 are forecast at $5.27 billion, less than a 2-percent increase from 2007. Direct payment rates are fixed in legislation and are not affected by the level of program crop prices. Since 2004, there has been little change in direct payments by crop year. The small fluctuations realized across calendar years are the result of changes in the number of farmers taking advantage of the advanced payment in December (optional), affecting the share of the payment rolled into the following calendar year.

Countercyclical payments are forecast to decrease from $1.2 billion in 2007 to $934 million in 2008. This follows a large decrease in 2007. Of crops produced in 2006 and 2007, only upland cotton and peanuts received payments. This is quite a change from 2004 and 2005, when more than half the payments were to corn. Producers may elect to receive countercyclical payments in three installments. The first partial payments are available in October of the calendar year of harvest. The second partial payments are made the following February, with the final payments after the end of the marketing year for the program crop. Countercyclical payments in calendar year 2007 include the second partial and final payments for 2006 crops and the first partial payment for 2007 crops. For calendar year 2007, we assume that 60 percent of the producers receive 35 percent of their payment as first partial payments. The second partial and final countercyclical payments (as determined at the end of the respective marketing year) are paid the following calendar year. Partial payments are based on the projected payment rate at the time of the payment, creating the possibility of an overpayment.

Marketing loan benefits—including loan deficiency payments, marketing loan gains, and certificate exchange gains—are projected at $8 million in 2008. In 2008, only wool, mohair, and pelts are expected to realize marketing loan benefits. In 2007, upland cotton producers realized almost 99 percent of the total marketing loan benefits, of which 95 percent were certificate exchange gains. At current price levels, marketing loan benefits are not available to any of the other program crops.

Forecast at $800 million in 2008, Tobacco Transition Payment Program (TTPP) payments are expected to be almost 17 percent lower than in 2007. Payments reported here include both CCC payments and lump-sum payments. Begun in 2005, this program provides payments over a 10-year period to eligible quota holders and producers of quota tobacco. Lump-sum payments to individuals are made through agreements with third parties in return for their rights to the 10-year TTP payment stream. Because significant lump-sum payments were made in 2005 and 2006, actual payout to producers is expected to continue declining beyond 2008.

Conservation programs include all conservation programs operated by the Farm Service Agency (FSA) and the Natural Resources Conservation Service (NRCS) that provide direct payments to producers. Estimated conservation payments of $3.0 billion in 2008 reflect programs being brought up toward funding levels authorized by current legislation.

Ad hoc and emergency program payments, forecast at almost $3.4 billion in 2008, include all programs providing disaster and emergency assistance to farmers. USDA started making disaster payments appropriated under Title IX (Agricultural Assistance) of the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007, in late December. However most of the expected $2.8 billion is going to be realized by farmers in 2008. Section 743 of the Consolidated Appropriations Act, 2008 (enacted December 26) further extends the period of eligibility for disaster assistance from February 28, 2007, to December 31, 2007. This is expected to result in an additional $602 million in disaster assistance payments in 2008.

Government payments, 1998-2008f d

2004-2008—Sustained High Earnings for U.S. Agriculture

If current commodity and input market prospects hold for the remainder of the calendar year, 2008 will be a record year for the value of crop production, crop receipts, revenues from forestry and services, total value of farm sector production, gross value added, net value added, net farm income, and production expenses for both purchased inputs and payments to stakeholders. Value of livestock production and livestock cash receipts will be down by only 2 percent from the record levels achieved in 2007. This string of record and near-record economic activity across so many components of the farm income accounts is unparalleled in the last several decades, and both crop/livestock operations and suppliers of services and inputs should share in U.S. agriculture's record economic showing.

The past 4 years have witnessed exceptional earnings for U.S. agriculture. Including the forecast for 2008, these values of crop and livestock production will each have established new highs three times in the five most recent years (2004-08). Likewise, net value added to the U.S. economy will also have established three new record highs, and all five years represent the five highest levels of value added for U.S. agriculture. Net cash income has also established multiple record highs during 2004-2008. The late 1980s and early 1970s were the last comparable periods when U.S. farming enjoyed multiple years of sustained high levels of output and income.

Even on an inflation-adjusted basis, 2008 will be an exceptional if not record-breaking year. With income expressed in constant dollars (2000 = 100), the forecast for net value added for 2008 would be the largest economic contribution since 1974. Net farm income mirrors net value added, with income (in constant dollars) trailing only 2004 as the largest in the last three-plus decades.

Net farm income and net value added, 1970-2008f d

See glossary.

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For more information, contact: Roger Strickland

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Updated date: March 7, 2008