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.
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.
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).
d
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.
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.
d
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.
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.
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.
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.
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.
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.
See glossary.
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